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Backward Bond Bets

Our long national "conundrum" may finally be over.

Long-term interest rates are moving up, and the yield curve is at long last steepening. And for the folks who were skeptical of the Fed's rate-hike campaign over the last two years, well, they don't have Alan Greenspan to kick around anymore.

So now that Treasury bonds are at last responding to the Fed's maneuvers, is there a way to make money off of them?

Since January, the yield on the benchmark 10-year Treasury note has jumped from 4.5% to 5%. Phil Roth, technical strategist for Miller Tabak, says yields of 5.5% or even 6% aren't too difficult to imagine by year's end.

"If the Fed stops hiking rates at 5%, then long-term yields should end up decently above short-term rates," says Roth. "That means a yield of 5.5% or more is an entirely reasonable prediction."

Fundamentally speaking, Nathan Rose, a fixed-income trader at the fund family Payden & Rygel, says long-term rates will continue to rise "should the economy merely maintain the blistering pace it set in the first quarter of 2006." Advanced first-quarter gross domestic product numbers will be released later this month, and expectations are for growth of nearly 4.7%.

For fixed-income investors who are convinced that the economy will remain in overdrive and that long-term rates will continue to head north, one option is inverse bond mutual funds. These funds increase in value if interest rates go up, a feat of financial wizardry accomplished by portfolio managers short-selling Treasury bonds.

The two largest funds in this category are the $1.53 billion (RYJUX) fund and the $414 million (RRPIX) fund.

The Rydex Juno fund's benchmark is the inverse of the daily price movement of the 30-year U.S. Treasury bond, often referred to as the long bond. If the fund meets its objective, the value of the fund's shares will increase when the price of the long bond decreases. For example, if the price of the long bond goes down by 2% (lifting yields higher, since bond yields move inversely to price), the value of the fund's shares should go up 2% on that day.
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