Bond exchange traded funds (ETFs) are being hit by lingering doubts about the government’s proposed $700 billion bailout.

As it becomes clear that getting the plan into action will take longer than previously thought, Treasury prices are rising, reports David Goldman for CNN Money. The high price tag of this bailout could also weigh heavily on the dollar, sending inflation higher and making long-term debt investors nervous that their Treasuries will become nearly worthless as they mature.

To finance the bailouts, the Treasury sold $34 billion in two-year notes yesterday, the largest auction in history. A $24 billion auction of five-year notes is to take place today.

Analysts disagree about what it all means: one says that a flight to quality is diminishing, but another says that the support shown in Wednesday’s auction says otherwise.

Last week, yields fell to historic lows as the credit crisis seemed to come to a head. The 10-year benchmark fell to 3.25% yesterday, while the 3-month yield dropped to 0%.

Market volatility is all to blame, and while recent news of market meltdown has irritated these swings for bond ETFs, they have had skewed tracking all year.

• iShares Lehman TIPS Bond (TIP): up 2.9% year-to-date; 6.39% yield
• iShares Lehman 1-3 Year Treasury Bond (SHY): up 3.5% year-to-date; 3.48% yield

For full disclosure, some of Tom Lydon’s clients own shares of TIP.

Tags: Bond ETFs, SHY, TIP, Treasury Bonds