17th Nov 2009 by Michael Haltman
Shorting treasury bonds is a bet that prices are going to go down and yields are going to rise. Because the typical issue of bonds is extremely large with good liquidity, an investor can go to their broker and say that they want to short treasury bond xyz with CUSIP number xxxxxxxxxx. It is the cusip number that is the true identifyer for the bond, not the coupon and maturity because there can be more than one issue with the same characteristics.
Once the bonds are sold or shorted, at some point in the future the investor will go back into the market to buy the bonds with the same cusip and close out the trade. The risk to an investor is that for some reason that cusip is not available in the marketplace, in which case the holders of those bonds have to be approached and offered a price for their bonds. This can be what is known as a short squeeze.
An alternative way to short the treasury market would be with treasury futures.
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