Many investors have been stunned by the low yields on US government bonds over the past six months. Even as Washington’s fiscal outlook began resemble Buenos Aries’ – the deficit this year is forecast at 13% of GDP- 10 year yields remained under 3%. Financial luminaries from Bill Gross to Warren Buffet have all called this situation unsustainable, with Buffet calling the treasury bubble “equally extraordinary” to the housing bubble.

Now reality is finally catching up with the treasury market. Since March 18 10-year yields have risen from 2.5% to just under 3.5%. The 20-year note has performed similarly, now approaching 4.5%.

Investors who have been patiently waiting in the Proshares UltraShort 20-year Treasury (TBT), an ETF which shorts the 20-treasury note, are finally reaping their rewards, with the fund up 17% since mid March. 

As investors start to worry about the increasing risks of inflation, credit downgrades, or even a US sovereign default , they are demanding higher yields on US debt. Higher yields mean lower prices, and a higher TBT, as the leveraged fund aims to return 200% the inverse of long dated treasuries.

Rates above 5% would mean a healthy return for the fund. But the macroeconomic fundamentals of the American economy would suggest a 20 year note closer to 10%.

Other ETF plays on rising long term rates exist. The ProShares UltraShort Lehman 7-10 Year Treasury Bond (PST) shorts the middle of the treasury market. But rates are expected to explode highest on the longer end of the curve, so TBT would likely be a better choice.

Direxon carries two 3x leveraged ETFs that short treasuries. The Direxion Daily 30-Year Treasury Bear 3x Shares (TMV) tracks 3x the inverse of the 30 year note, and the Direxion Daily 10-Year Treasury Bear 3x Shares (TYO).

Both are too volatile to hold over the long term, but would be great to own the day before the US loses its AAA credit rating.

The treasury market is poised for a collapse not unlike that of the subprime market two years ago. Write your own John Paulson story with the TBT.