This was written by Eric Oberg and originally published on RealMoney.

Editor's note: Eric Oberg is back again. We have received a few questions about the ProShares UltraShort 20+ Year Treasury ETF, so rather than answer each individually, here is a quick answer to the question below.

Does the TBT -- Treasury UltraShort -- have the same compounding issues that other UltraShort ETFs have?

Oberg: OK, I'm glad this came up again. My thinking has really started to evolve around the concept of being short Treasuries. (I have been asked by probably half a dozen people over the last week and a half, through the Web site and in person, about the concept of shorting Treasuries.)

As for the technical issues, the short answer is yes -- as a double short, it is subject to the same issues. However, it is really the volatility that kills these things, and it appears that the less volatile sectors do not suffer from the dramatic underperformance as the highly volatile sectors (and I believe that the narrower the sector, the more they influence the underliers, and thus they create their own volatility). But the Treasury market is probably the deepest we have, so activity in any Treasury ETF shouldn't really wag the dog.

For full disclosure, I really only looked in depth at performance of ProShares UltraShort Financials (SKF), ProShares UltraShort Real Estate (SRS) and ProShares UltraShort FTSE/Xinhua China 25 (FXP), just because those sectors seemed to be the most talked about, and those also moved around the most.

Now, with that said, I have been thinking about the concept of shorting Treasuries, just in general. In 1998 when I ran the ABS trading desk at Goldman, my "hedge" for the book during the Long Term Capital Management crisis was to go out and buy Treasuries at 50 or 75 basis points of negative carry. This is opposite of a normal hedge, where you'd short Treasuries to insulate from the interest rate risk in a credit/ABS book. So while I do agree that the prospect of 3% over the next 20 to 30 years seems pretty dismal, I do believe that owning Treasuries is really one of the few hedges one has against risky assets.

Think of it this way: If you short Treasuries and if risky assets continue to come under pressure, then Treasuries will become even more "dear" (to use a British term). So in a way, shorting Treasuries is doubling up a bet on risky assets -- it is essentially the same thing as buying risky assets, so why not just go out and buy a risky asset instead where the upside may be better? (Albeit, there is probably more potential downside with risky assets than in shorting Treasuries.)

This past week, Goldman's economics group put out an interesting study about cyclical turning points and asset market activity. Goldman took eight pages to describe what I am going to attempt to summarize in a few sentences, but it found that generally speaking, risk assets tend to trough before interest rates and commodities. The thought is that equities are more leveraged to growth risk, and bonds/commodities more leveraged to the amount of slack and inflation. The group found the trough in yields to be around the peak of unemployment (more or less), whereas the trough in equities and equity volatility was sooner.

So, will it be the same this time around? Who knows? But I do believe that being short Treasuries at this point is doubling up risk exposure -- Treasuries are your main hedge of the world going pear-shaped (particularly if you are a U.S.-based investor). And although I mentioned that I am not thrilled by the return prospects their yield implies, I would not want to be short just yet. I believe you will have time for that ... but now may be too early.

One other point. With the overnight rate as low as it can get, the Fed will use other measures (quantitative easing, etc.), and the central bank has stated that those could include assuring rates will be kept low for quite some time and targeting term rates. And if we do go further into debt deflation, you want to own debt, not owe debt...

I am working on some follow-ups to my "When Capitalism Ate Itself" piece, and while I have not put words to paper yet, I have some vague thoughts about the market not really healing until we develop less of a speculative mind-set and more of an investment mind-set. The numerous questions I have received about two-times shorting Treasuries tells me we still have some wood to chop!

Know what you own: A number of bond-related ETFs might be of interest to readers of this column, including the SPDR Barclays Short-Term Municipal Bond ETF (SHM) , the SPDR Barclays Municipal Bond ETF (TFI), the iShares Barclays 20+ Year Treasury Bond ETF (TLT), the iShares Barclays 7-10 Year Treasury Bond ETF (IEF), the iShares Barclays 1-3 Year Treasury Bond ETF (SHY), the iShares Barclays 3-7 Year Treasury Bond ETF (IEI) and the iShares Barclays 10-20 Year Treasury Bond ETF (TLH).

Posted on Jan. 26, 2009

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