Inverse Bond Funds - Betting Bond Prices Go Lower

The Wall Street consensus is that the long-term bull market of falling yields and rising prices in bonds is over. For example, they are betting that the 10-year bond may have bottomed at 3.1% in June 2003. Since then the yield has moved to over 4% and bond prices have fallen accordingly.

If you agree that bond yields are on the way up and you want to benefit from falling bond prices, you can buy a an inverse bond fund. This type of fund uses various techniques to short U.S. Treasury bonds. Therefore, as interest rates rise and bond prices fall, the value of the fund shares rise accordingly; thus the name inverse bond fund.

Here are three funds that will make money as bond prices fall.

The Rydex Juno Investor rises 1 percent for each 1 percent decrease in bond prices. The Profunds Rising Rates Opportunity and the Potomac ContraBond Fund seek to rise 1.25 percent and 2 percent respectively for every 1 percent decrease in bond prices.

Each of these funds is extremely volatile and should and not be purchased by the fainthearted. If interest rates were to fall, the prices of these funds would fall very rapidly. But if you hold bonds for long-term income, one or more of these funds could give you a hedge against rising rates and falling bond prices.

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