I suppose you could take a long-term position in an inverse Treasury ETF, Murray. But there are risks.

As you suggest in your blog, and as my recent report pointed out, the fact that Treasuries have a lower average volatility than equities means that an investor buying a leveraged or inverse Treasury ETF can expect the return of that fund over a month or two to stay relatively close to a simple multiple of the index.

That contrasts with the more volatile equity markets, where the numbers can go awry much faster.

The risk, of course, is that if the Treasury market takes a nosedive … which is what you’d be rooting for if you bought something like the ProShares UltraShort 20+ Year Treasury ETF (NYSE Arca: TBT) … it’s unlikely to do so in an orderly fashion.

In fact, if you look at the historical volatility of Treasuries, it was highest right around 1980, when inflation was raging and the economy was on a shaky footing. If that’s the kind of environment investors expect, they will need to monitor the performance of funds like TBT on a regular basis.

Indeed, Treasury volatility is way up over the past year. And while it’s still very low compared to equities, it means that these funds—like all leveraged and inverse ETFs—are not “set it and forget it” propositions.

Just look at the one-year returns of TBT versus its long-only peer, the iShares 20+ Year Treasury ETF (NYSE Arca: TLT). While TLT is almost flat over the past 12 months, TBT is down about 25%, as the volatility spike in the Treasury markets in December 2008 and January 2009 hurt the fund’s returns.

Since then, the Treasury markets have settled down, and the returns of TBT versus TLT over the past few months have been close to a simple -2-to-1 ratio.

As you suggest, you can manage around the compounding issue by rebalancing your position periodically.

I walk through the basic math of this rebalancing in slide 25 of our recent webinar, Getting Leverage, Going Short. An investor could set tolerance bands and periodically work with the funds to maintain their desired exposure.

I’m not 100% sure that it’s worth the effort when you can use other tools to gain similar long-term exposure (futures, options, shorting regular ETFs, etc.). But for an investor who wants -2-to-1 leverage and doesn’t want to use a derivatives account, it is an option.

For what it’s worth, most investors who are worried about U.S. Treasuries should start by reducing the exposure they already have to Treasuries and thinking about ways to diversify their bond portfolios.