Here’s and investment that’s such a rip-off that Eliot Spitzer ought to be investigating it.

It ties up your money for five years and produces almost no profits. And then you have to pay taxes on the profits you didn’t make in the first place.

Who would sell unsuspecting investors such a horrible investment? The US government, that’s who.

And if you’re like most investors, you probably have this rip-off in your portfolio right now. I’m talking about US Treasury bonds.

Just do the math, and you’ll see. Suppose you buy a five-year Treasury bond at today’s market price — it yields 3.48%. That means that for every $100 you invest, you get $3.48 each year in interest.

Not a stellar return, but at least it’s safe — right? Wrong. You’re forgetting about inflation. On Wednesday the Department of Labor announced the latest Consumer Price Index, and right now inflation is running at an annual rate of 3.24%. That means that in a year, when your $100 bond investment has produced income of $3.48, you’ve lost $3.24 to inflation.

Yep — all you’ve got left is 24 cents. So that’s your “real” return — less than a quarter of a percent.

But you’re forgetting about taxes. The IRS doesn’t care about inflation — it’s going to collect taxes on the whole $3.48 in income you earn each year. Let’s say your marginal federal tax rate is 25%. That means you’re going to pay taxes of 87 cents.

So let’s total it up. You made 24 cents after inflation, and you paid 87 cents in taxes. Sounds like a net loss of 63 cents to me.

You can make the problem smaller by buying Treasury bonds of longer maturities, but you can’t make it go away. Ten-year bonds now yield 4.12%, so after inflation you end up with 88 cents. At a 25% tax rate, you pay $1.03 in taxes, so your net loss is 15 cents. Better than a 63 cent loss with the five-year, but still a loss.

Don’t even think about buying shorter-term Treasury. Ninety-day bills now yield 2.09%. That makes you a loser of $1.15 per $100 invested just from inflation alone. Add the tax burden and your looking at a loss of $1.67!

These are the numbers — check my math and see for yourself.

It’s not normally this way. Typically, with inflation running as high as it is now, Treasury-bond yields would be priced with much higher yields. For example, over the last 50 years, 10-year Treasury yields have been about 2.7% above the inflation rate. Today it’s only 88 basis points (0.88 percentage points) above inflation — less than a third of the normal level. Yields have been this low relative to inflation only once in the last 25 years (the exception existed for just a single month — March 2003).

How can Treasury bonds possibly be priced as they are today? Who would buy them when they practically guarantee an after-tax loss?

Those are excellent questions, and the absence of credible answers leads me to a deep conviction that Treasurys should be avoided at all costs. In fact, they should be sold short. With yields so low in relation to inflation, something’s just got to give — yields have to rise, and that means Treasury prices have to tumble. And tumble a lot.

But before we call our brokers and start shorting T-bonds, let’s consider all the possible explanations for today’s incredibly low yields. Could the market somehow be right about this?

One remote possibility is that investors buying Treasurys don’t plan on paying taxes. That would make sense if they held their Treasurys in IRAs, 401(K)s or other pension plans — or if they were tax-exempt entities like foreign governments. It’s true that foreign governments hold more Treasurys now than ever before. But I just don’t think that’s enough to explain such a large and unusual pricing anomaly.

A more likely explanation is that investors don’t think today’s high inflation rates are going to last. Over the last 50 years, situations like today’s have always come during periods of a spike in inflation. Investors, it seems, automatically treat all inflation surges as temporary — by failing to price Treasurys to yield enough to fully reflect the surge.

Over history, sometimes that’s been the right call and sometimes it’s been the wrong call. Some inflation surges have been temporary, and others were just foreshocks of higher inflation yet to come. Right now I’m absolutely positive that it’s the wrong call. Today’s uptick in inflation is not a temporary spike — it’s the beginning of an inflationary acceleration that will last for the next several years, at least. With the price of gold at 16-year highs and the US dollar at nine-year lows, the signs of impending inflation are simply too obvious to ignore.

My last explanation is, I think, the most powerful. It is simply that the Federal Reserve is holding short-term interest rates artificially low, and this has the effect of systematically lowering interest rates across the whole spectrum of maturities to some extent. The absurdly low yields we see now in Treasurys are telling us that the Fed has been keeping rates too low for too long. And that, by the way, is what has created the inflation we’re beginning to see.

Here’s how this is going to play out. The Fed is going to raise rates — perhaps just at the “measured” pace they’ve been promising, or perhaps faster. As short-term rates rise, so will all Treasury yields. At the same time, inflation is not going to go away. As investors realize that, they’ll start pricing in higher yields to protect themselves from that inflation. And when they start doing that, the Fed will finally get the idea — and that will cause them to hike rates even more.

So that leaves me utterly convinced that Treasurys are a dangerous accident just waiting to happen. There’s just no case for holding them. None. And there’s a very strong case for shorting them.

There are lots of ways to short Treasury bonds. You can do it directly, by selling actual securities short. Or you can short shares of a convenient exchange traded fund — the iShares Lehman 20+ Year Treasury Bond Fund. Or you can short Treasury futures contracts — or sell calls (or buy puts) on Treasury futures contracts.

Another way is to buy shares in either of two unusual mutual funds designed to go up when Treasury bonds go down — the Rydex Juno Fund or the Rising Rates Opportunity ProFund.

The following is an “Ahead of the Curve” column published November 19, 2004 on SmartMoney.com, where Luskin is a Contributing Editor.