By Roberto PedoneBALTIMORE ( Stockpickr) -- Is the U.S. bond market trading at bubble levels, ready to bust at any moment? That's a conclusion that can be easily reached when you consider the amount of money flowing into this sector from the retail investor. The Investment Company Institute, which tracks money flows into retail mutual funds, estimates that individual investors took out $9 billion from U.S. stock funds in the first three weeks of July, and poured $20 billion more into corporate and government bond funds. Clearly, the retail crowd is looking for a safe place to park their money since the stock market has produced very little in terms of total returns this year. What's strange about this overwhelming money flow into bonds is that the returns in the fixed income market are currently low, but investors are still willing to take those low returns in exchange for the promise of the return of their money. This could mean that market players are worried that a potential collapse is coming for the stock market, and that the economy is heading for a double-dip recession. It could also mean that investors believe that the Federal Reserve will continue to keep rates low to fight off any chance of rising inflation. Rising rates or high inflation would do considerable damage to the fixed income market. But let's face it: Interest rates will not be this low forever, so some of the arguments made by the bond bulls are starting to look misguided. Retail investors aren't the only market players who're giving up on stocks and the market in general. Legendary hedge fund manager Stanley Drukenmiller said Wednesday he is retiring from the money management business. Drukenmiller, who is famous for his bet against the British pound before Black Wednesday in the 1990s, said the stress of managing an enormous fund and competing in the markets has become too much. With Drukenmiller and the retail investor largely throwing in the towel on stocks, market players might be best served by putting on their contrarian thinking caps. A crowd mentality in any type of investment is usually a guaranteed receipt for disaster, and that seems to be what is developing in the bond market. The one argument against a bond bubble is that bonds have never seen a major collapse in price. In fact, the worst 12-month loss for the U.S. bond market was less than 10%. However, the same things were said about the real estate market right before that bubble popped. The point is that when the least amount of people expect something to happen in the market that is preciously when the possibility of it happening increases dramatically.
Here 's a look at a number of ways to play a potential U.S. bond bubble. Shorting an actual bond isn't any easy task for most individual traders since it can be a complicated process to execute. However, shorting a bond ETF, or buying a short bond ETF is a much simpler way for the individual investors to play this possible trend. One way to bet against bonds is to short the iShares Barclays 20+ Year Treasury Bond Fund ( TLT). This ETF gives an investor exposure to long-dated Treasuries, while usually offering a higher yield and more interest rate risk than government bonds with a shorter time to maturity. Year to date the TLT is up around 18% which is far better than the returns seen in the S&P 500, which have produced a decline of 3.3%. The all-time high for this ETF is just over $120 a share, and currently shares are trading at around $106. This ETF has been in a well defined uptrend for awhile with prices recently breaking out above some previous resistance at around $102. If you think bond prices are setting up to fall, this could be an excellent short and it could possible trend down towards the 52-week low of $87.30. Another way to short bonds is simply by buying the ProShares UltraShort 7-10 Year Treasury ( PST), a leveraged ETF that seeks a daily investment result that corresponds to 2x the inverse of the daily performance of U.S. bonds that have a remaining maturity of between 7 to 10 years. If you go long this ETF you will be able to capture any future decline in bond prices. Those gains will be well above average because the PST looks to capture $2 for each $1 drop in the daily value of U.S. Treasury bonds. This ETF has been in a clear downtrend since its official launch date back in 2008 when shares were trading at close to $75 a share. With the PST currently trading at around $40 a share, I would recommend waiting for this ETF to trade sideways and end its downtrend before jumping in. Let the trend reverse and confirm that prices have the chance to change direction before making a bet on a bond bubble with this ETF. Remember, bubbles in any asset usually last a lot longer than most people think, so being early could produce large losses to your trading account.
Another bond short ETF you can play if you see a bond bubble on the horizon is the ProShares UltraShort 20+ Year Treasury Fund ( TBT). This ETF seeks daily investment results that correspond to 2x the inverse of the daily performance of U.S. Treasury securities that have a remaining maturity greater than 20 years. This is probably my favorite bond short play because it is one of the most liquid with the three-month average trading volume sitting at around 15 million shares. Keep in mind that rates on 30-year bonds are currently trading near levels last seen back in March of 2009, which is precisely where the S&P 500 put in its bottom and subsequently rallied from the 666 lows towards the 2010 highs of around 1219. To see more stocks and ETFs that could be great plays on the possibility of a future bond bubble, such as Direxion Daily 10-Year Treasury Bear 3x Shares ( TYO) and Direxion Daily 30-Year Treasury Bear 2x Shares ( TMV), check out the Top Bond Bubble Plays portfolio on Stockpickr. -- Written by Roberto Pedone in Winderemere, Fla.