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The prices of credit default swaps (CDS) - the derivatives that professional investors use to bet on
falling bond prices - have never been cheaper. April 2006

CDS are the "default insurance" of the bond market. When anxiety is high, the price of this insurance rises. And when anxiety is low – and complacency is high – the price of insurance falls. Today, CDS prices
are as low as they have ever been. In short, bond investorsfear no evil.

Grant advises buying credit-
default swaps (CDS) on a basket of bonds. But he readily concedes that the average individual investor would "find it impossible to put on the trade...So we apologize in advance to the nonprofessionals in the greater Grant'sfamily."

Do not despair, however, Team Rude will suggest a couple of approximate substitutes. Several newly minted mutual funds seek to profit from a drop in bond prices (rise in yield):

Rydex Juno, the granddaddy of short-selling bond funds, profits whenever the price of the 30-year Treasury bond falls. As such, Juno can be counted on to prosper during an all-encompassing rout in the bond market. But since the greatest excesses in the bond market reside in the corporate sector – rather than the Treasury sector – bearish bond investors might wish to focus their attention on corporate debt securities.

For example, the iShares GS$ InvesTop Corporate Bond Fund (NYSE: LQD) is an ETF that tracks an index of investment grade corporate bonds. The bearish investor could either sell short this ETF or buy long-dated put options on it.

Shimmying farther out onto the crackling branches of risk, one finds the Flex Bear High Yield Fund (AFBIX), which provides a direct play on shorting corporate junk bonds. This open-end mutual fund actually does what Grant advises; it buys credit-default swaps. Specifically it buys CDS on the Dow Jones CDX North American High Yield Swap Index.

For the last several years, as junk bond prices have soared, buying CDS has not been a terrific idea. But in the less tranquil world that Grant anticipates, they may prove to be a fine item to own. As Grant points out, "The odds of an outlying event do not change just because the market is complacent." Nor do the odds change because the cost of insurance is very low. Maybe it's time to take out a policy.