The moment of truth is approaching for the iShares Barclays 20+ Year Treasury Bond (TLT). As interest rates nudge upwards, the price of these long-term government bonds have been falling.

If Fed chief Bernanke can figure out a way to ratchet down interest rates, these bonds could begin to rise again. But he’s painted himself into a corner.

Bernanke could tell the Fed to extend its $1.75 trillion policy of buying government and mortgage bonds. That would lower rates in the short term.

But a policy of the government lending trillions to itself puts the government’s printing press into overdrive and practically guarantees hyperinflation in the future. That, of course, would make these bonds much less desirable and drive prices lower.

And if the Fed doesn’t step in as a major buyer of bonds? The supply of bonds the U.S. government will be issuing could easily overwhelm demand – pushing up interest rates (and thus lowering the price of bonds).

So, longer term, prices will fall. But look at the chart. In the shorter term, these bonds will be getting strong support at the 85-mark. Combined with a government decision to continue to buy them and a pullback in the market (driving investors into bonds), prices should bounce up.

But it’s only a matter of time that long-term government bond prices begin another major leg down.  And you can play both directions by buying long or shorting the TLT ETF.

Source: The Bernanke Conundrum Guarantees Hyperinflation