Bonds are an interesting investment right now.  There is definitely a tug of war going on, particularly with U.S. government bonds.  On the one hand, bonds should be doing poorly with interest rates rising because of all of the money printing.  Bond buyers should be asking for higher rates to compensate the risk of inflation.  On the other hand, bonds should being doing well (which they generally have been) because the Fed is buying them.  Who wants to compete against the Federal Reserve, with the deepest pockets in the world?  If the Fed announced that it would be buying shares of Microsoft, I would expect the stock price of Microsoft to skyrocket.

The relationship of interest rates and inflation can be a bit confusing.  It is like wondering if someone wearing a jacket is hot or cold.  He might be wearing a jacket because he’s cold or he might be hot because he’s wearing a jacket.  The cause and effect are not always clear.  It is much the same with interest rates and inflation.

Ultimately, artificially low interest rates and money printing usually translate into price inflation.  But even that is not a guarantee.  Japan has had low rates for a couple of decades with little price inflation (although it hasn’t really been deflationary as many will claim).

There is no doubt that the Fed’s policy is inflationary and will probably translate into higher prices in the future.  Unless Helicopter Ben isn’t really who he says he is, then I would expect the money creation to continue as long as there is high unemployment with a weak economy.  I think the only way he will pull back is if there is a threat of really massive inflation.

In the long run, shorting bonds will probably be a good speculation.  It is a speculation though because nothing is a sure thing and we also don’t know the timing of it.  I would not short bonds in the next 6 months.  Bernanke and the Fed will be implementing QE2, which means they will be buying government bonds.  I would not compete against them.  There is no guarantee that their purchases will drive down rates as intended, but I also wouldn’t fight it.  We should look for higher price inflation before we start considering a short play.

When it is time, there are easy ways to bet against bonds.  If you aren’t into options, you can purchase a double inverse ETF of longer term government bonds (symbol: TBT).  As interest rates go up, the fund will also go up.

Again, it might be an interesting speculative play in the future, but I would be patient and not bet against the Fed right now.