Question
How to short bonds?
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17th Nov 2009 by Michael Haltman
Shorting bonds, like stocks, is a bet that the price is going to fall. Shorting bonds can be more difficult because at the end of the trade the investor needs to be able to buy the bonds back. The actual mechanics of shorting is first selling bonds you don't actually own. In an extremely liquid market such as treasuries which have extremely large bond offerings, finding the bonds to purchase to close out a trade will not typically be that difficult. In a fragmented market such as municipals, where bond issues are relatively small and the bonds within any one maturity even smaller, finding the bonds to buy to close out a trade can be difficult, so shorting actual bonds is much less common. More often municipal futures are used. The same will typically hold true in the corporate bond market as well.
Shorting bonds, like stocks, is a bet that the price is going to fall. Shorting bonds can be more difficult because at the end of the trade the investor needs to be able to buy the bonds back. The actual mechanics of shorting is first selling bonds you don't actually own. In an extremely liquid market such as treasuries which have extremely large bond offerings, finding the bonds to purchase to close out a trade will not typically be that difficult. In a fragmented market such as municipals, where bond issues are relatively small and the bonds within any one maturity even smaller, finding the bonds to buy to close out a trade can be difficult, so shorting actual bonds is much less common. More often municipal futures are used. The same will typically hold true in the corporate bond market as well.
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1st Nov 2009 In Bonds
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