Although shorting the U.S. 30-year bond has been one of those unfortunate trades nicknamed a "widowmaker" (thanks to the steady and, often, surprising decline in interest rates over the past three decades), I believe that for those with a patient timeframe (one to three years), Ben Bernanke last week finally made this a safely asymetrical bet with minimal downside and -- depending on leverage -- 100% or better upside. Ironically, Bernanke did this by promising extremely low rates through 2014 and not ironically by announcing a clear priority to fight unemployment over fighting inflation. (Of course, whether or not a ZIRP policy really does fight unemployment is highly debatable, but that's a topic for another article.)
To understand why Bernanke's comments ensure that the Fed will lose control over long-term rates over the next few years (if not much sooner) we can study the 1940s, when the Federal Reserve attempted to cap rates on the U.S. 25-year bond at 2.5%, but was only able to do so for as long as investors were convinced the Fed was committed to fighting inflation. Here's (pdf) an excellent article detailing exactly how this happened; the gist of the story is that as soon as investors no longer believed in the Fed's inflation-fighting commitment, private sector rates soared (thereby choking the economy) and the Fed was forced into a highly restrictive policy in order to re-prove its commitment to fighting inflation.
As for the downside risk in this trade, Bernanke made it quite clear that he's targeting a level of at least +2% a year in the core PCE Deflator, and as "The Inflation Trader" pointed out last week in this Seeking Alpha article, the PCE tends to run about .25% lower than the CPI. Additionally, Bernanke said that if unemployment were running high, he'd provide additional flexibility (to the high side) in his inflation target, so it clearly sounds as if the Fed is actually now targeting close to a 3% annual increase in the CPI (and, unlike the Japanese, "Helicopter Ben" has clearly demonstrated that he has the "skills" to achieve this).
Thus it seems unlikely to me (especially as the Fed's "Operation Twist" has supposedly been buying nearly all of the 30-year issuance, and that program ends in June) that the 30-year bond will be able to sustain a level below the recent low yield of approximately 2.7% set this past October, and this would only be approximately 11% below last week's close. (By way of comparison, the yield was as high as 4.37%-- nearly 43% above Friday's close -- as recently as this past June 30.) Even if "Operation Twist" were to be extended beyond June, it seems unlikely-- in light of Bernanke's newly explicit inflation target -- that the Fed would be able to drive the 30-year yield below what it was able to achieve before going public with that target.
A reasonable way to short the 30-year U.S. treasury bond is by buying TBT, an ETF that returns 2x the direction of the interest rate (i.e., the inverse of the price) of the bond. Although I'm usually extremely averse to holding a leveraged ETF over a long period of time (and remember, this could take several years to play out), TBT seems to have had a reasonably low degree of "tracking slippage" (less than 3% a year), probably because moves in the bond market tend to be somewhat gradual.
Keep in mind that because TBT is a leveraged ETF, my projected 11% downside risk in the bond yield would translate into an approximately 22% lower TBT share price. On the other hand, a climb back up to the 4.37% yield of this past June would mean an approximately 86% gain in the price of TBT and a climb in yield to 5% -- which was seen as recently as 2009 -- would translate into an approximately 130% gain in the price of TBT.
Although I entered this trade last week, a slightly safer entry point might be upon the closing of the gap up in yield from 2.96% that occurred between this past January 18, and January 19; i.e., to enter the position if the bond's yield dips back down to that 2.96% level.
Disclosure: I am long TBT.