pain hurts because it s the body s way of telling us that something s wrong. And when we feel it, in our bodies or in our investment portfolios, we have two choices: acknowledge the pain and make a change, or ignore it and hope it goes away. I'm not one for wishful thinking.

Lately, there s been little pain for stock investors the S&P 500 now sits at a two-year high but bond investors have been wincing in agony. In the month since we highlighted new tools with which to bet on higher interest rates, the yield on the 10-year-note has jumped from 2.8% to 3.2%, the weakest four-week performance in a year that culminated Wednesday in the worst one-day selloff since the Lehman Brothers collapse. It s been the ugliest two days for bonds in a decade.

Supposedly safe bond funds like iShares Barclays 20+ Year Treasury Bond, iShares S&P National Muni Bond and iShares Barclays 7-10 Year Treasury have fallen 4% in just one month, pushing yields to June highs. Closed-end funds like Pimco Municipal Income Fund II, Nuveen Insured Municipal Opportunity and Federated Premier Municipal Income Fund have been crushed even more. Bond yields move inversely to prices.

Tough Months for Munis

BlackRock MuniEnhanced Fund, Inc. (MEN), Invesco Van Kampen Municipal Opportunity Trust (VMO), Invesco Van Kampen Trust for Insured Municipals (VIM), Nuveen Insured Municipal Opportunity Fund, Inc. (NIO), MFS High Income Municipal Trust (CXE), PIMCO Municipal Income Fund II (PML), BlackRock MuniHoldings Fund II, Inc. (MUH) 6 months

A 300-point drop in the Dow would be the lead story on every newscast in the country. But similar carnage in the bond market doesn t seem to get the headlines, despite the fact that credit markets are significantly larger and even more influential. The fact is that since the Federal Reserve announced it s QE2 plan to keep interest rates low, they ve actually risen sharply, culminating with a shocking spike this week.

The 2007 Storm Before the 2008 Storm

Citigroup (C), Fifth Third Bank (FITB), Bank of America (BAC), M&T Bank (MTB) 6/1/2007 through 12/31/2007

It s not that dissimilar to the action in banking and real estate stocks back in the summer of 2007. Long before credit crisis or financial collapse became vernacular, I remember blinking my eyes in disbelief as stocks like Citigroup, Bank of America, M&T Bank Corporation and Fifth Third Bank began sharply breaking down. That initial pain was a clear warning sign to get out of the way, and over the subsequent 18 months and various news developments the trend grew only more painful and more pronounced.

Betting on higher interest rates, either by shorting Treasury futures or by buying products like ProShares Short 20+ Year Treasury or Direxon Daily 7-10 Treasury Bear 3X, might not be your top bet. But every long-term trend starts as an objective, observable move over a day, a week, a month, right here, right now. And right now bonds are hurting, and interest rates are rising fast. You ve got to be either mighty brave or mighty foolish to ignore the pain.

At the time of writing, Hoenig s fund held positions in many of the securities mentioned.