Treasury Yield Discussion

Here is a letter from Vineer Bhansali at Pimco regarding his outlook for Treasuries.

http://www.pimco.com/LeftNav/Viewpoints/2008/Bhansali+Duration+Goodbye+Sept+2008.htm

Given the US government's rapid inflation exercise, which will likely have some sort of effect on currency depreciation, the Treasury yield should move out. If you look at the the long term bond yields in the chart linked above, you can clearly see that the Treasury market has experienced bouts of extreme volatility in the past. If you believe that there will be a massive contraction of liquidity on top of a general disenchanment with US Treasuries, then it is easy to envision how Treasury yields would blow out. Despite a lack of short-term volatility in the Treasury market, one can imagine that it would pick up to some increased level. What that level is is unclear.

So given that, it would seem that buying out-of-the-money puts on long dated Treasuries could turn out to be a fantastic play, particularly while the pricing on the bonds are high and the volatility is low. Still trying to figure out the specific mechanism for the trade. If anyone has ideas, please let me know.