U.S. Treasury bonds act as the benchmark securities for long-term interest rates. With these and other bonds, market prices move inverse to interest rate changes: Rising interest rates will result in falling bond prices. To profit from the higher rates-lower prices relationship, you need to establish a short position in Treasuries.
Be Aware of Risks and Trading Requirements
Short selling a security involves selling a security you do not own and then buying it back at a lower price to profit from the value decline. Another way to short is to buy derivative securities that increase in value when the underlying bonds drop. For bond prices to move a lot, it takes a large change in market interest rates. You can increase your profit when shorting the bond market by using securities that let you leverage the price changes. The different types of bond tracking securities allow you to tailor your strategy to the level of risk you can accept and the size of your brokerage or trading account.
Short Selling Bond ETFs
For individual investors, exchange-traded funds, or ETFs, provide the most liquid and low-cost trading vehicles to track the bond market. With a margin brokerage, you can short a Treasury bond ETF just as you would short sell shares of a stock. To short, you sell ETF shares borrowed from your broker and return the shares when you close the trade -- after share prices have fallen. Not all ETFs can be shorted, so check the individual ETF websites for trading restrictions.
Put Options on ETFs
Options are short-term contracts with values based on an underlying stock or ETF share price. Put options give you the right to sell an underlying Treasury bond ETF, and the value of the put increases when bond prices fall. With puts, you short the bond ETFs by buying the options. Options let you leverage price changes in the selected direction with your downside losses limited to the cost of the options. To trade options, you need a brokerage account that includes options trading authorization.
The financial services industry has developed inverse ETFs that change value in the opposite direction of a targeted asset class. Buying an inverse ETF is a shorting trade on the underlying bond index. An inverse Treasury ETF will increase in value when Treasury bond prices fall. Many inverse ETFs also employ leverage, which multiplies the change in value two or three times compared to the percentage move in Treasury bond prices. Inverse ETFs track daily price changes; over time, an up and down market can lead to a divergence between actual bond value changes and the inverse ETF returns. Inverse ETFs are short- to intermediate-term trading vehicles, not long-term investments.
Bond Futures Contracts
Treasury bond futures contracts provide the highest level of leverage against bond value changes.You can trade a contract worth $100,000 of Treasury bonds with a several hundred dollar margin deposit. Futures let you profit -- or lose money -- on small moves in Treasury prices. To profit from falling bond prices, open a trade by selling the futures contracts and close a trade with a counteracting buy order. Futures are traded through an account with a registered commodity futures broker. Futures are the riskiest way to short Treasury bonds.
- CME Group: U.S. Treasury Bond Futures Contract Specs
- Forbes: Using ETFs to Short the Treasury Market?... Read This First
- ETFDatabase: Inverse Bond ETFs
- ETFDatabase: Government Bond ETFs
- Seeking Alpha: Attractive Interest Rate Play With Treasury ETF Options
- Vanguard. "Leveraged, Inverse & Commodity Exchange-Traded Products." Accessed April 2, 2020.
- FINRA. "What Are Leveraged and Inverse ETFs." Accessed March 9, 2020.
- Fidelity. "Inverse ETFs." Accessed April 2, 2020.
- FINRA. "Leveraged and Inverse ETFs: Specialized Products With Extra Risks for Buy-and-Hold Investors." Accessed March 9, 2020.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.