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Shorting Bonds?


mcliu
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As a retail investor, you could short an ETF like TLT (long-term US treasuries... whether it's a bubble or not is up to you to decide).  You have to pay interest on the borrow.

 

I'm not really a fan of shorting... but am shorting a small amount of TLT anyways.  The reason why I don't like shorting common stock / ETFs are:

1- You need to keep your positions really small.  So you make no money and it's not worth your time researching shorts.

2- Illiquidity risk.  When you get margin called, your broker may screw you.  IB liquidates illiquid positions first... ouch.

3- Buy-in risk.  This has happened to me several times.

4- You have to pay interest on the borrow.  I shorted ATPG... eventually the borrow shot up to 90%+ (I covered early and avoided that... I also avoided the profits from ATPG going to 0).  That interest rate is just absolutely ridiculous... higher than credit card debt.

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I was thinking about this as well.  As I am sure everyone heard there is a discussion within the Fed members as to when to end QE3.  Were they to stop purchasing bonds, would the price not rise?  The article suggested they were buying $500B a year, every for the States that has to have an impact, no?

 

 

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Some ETFs tend to destroy a lot of the ETF holders' money unnecessarily (e.g. through transaction costs... especially the leveraged ETFs).  The short sellers know this and short said ETFs.  Unfortunately, this opportunity may be mostly arbitraged "away" as you have to pay interest to short these ETFs.

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Has anyone considered shorting bonds, particularly those with longer durations? Would love to hear your thoughts.

Also, what would the best way to short bonds as a retail investor?

 

TLT or Futures.  I am short through the futures market. I've also sold calls on TLT at 130 in past.  I've been short for about a year now.  Slightly up on the trade. 

 

Not a purely speculative trade as I am not a homeowner, and view it as hedging future borrowing costs should rates rise.  Also owned a significant amount of FFH long term bonds yielding over 8% at time of purchase, so can also view part of the trade as hedging these fixed rate bonds.

 

Do you really want to fight the FED?

 

Is this a joke?  30 year at a fixed 2.7 a few weeks ago vs. JNJ common at 3.5% that will grow (or hundreds of other similar equities). 

 

Keep in mind shorting bonds does not has unlimited loss risk (unless you believe rates could go negative in a substantial way, not just technically).  As such shorting at low interest rates is a trade with somewhat asymmetric payoff possibilities.

 

I was thinking about this as well.  As I am sure everyone heard there is a discussion within the Fed members as to when to end QE3.  Were they to stop purchasing bonds, would the price not rise?  The article suggested they were buying $500B a year, every for the States that has to have an impact, no?

 

(1) the fed won't stop buying bonds until inflation occurs

(2) inflation will raise rates

(3) the market is forward looking...rates will rise and bonds will fall in anticipation of inflation...before it occurs

(4) the fed doesn't have full control over the bond market.  The treasury is issuing new debt faster than the fed is buying.  A drop in demand would affect prices and yields. 

 

 

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http://pragcap.com/gundlach-where-to-invest-in-2013

 

Gundlach saying decent time to wade back into the bond market - sees 190bps on the 10y as a ceiling...

 

gundlach has also been saying for the last 3 months to buy stocks...

 

agreed, with stocks up 10% and the 30 year at 3.1% vs 2.7%, this is no longer as good of a trade, but that doesn't make me a bull on the bond market. 

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http://pragcap.com/gundlach-where-to-invest-in-2013

 

Gundlach saying decent time to wade back into the bond market - sees 190bps on the 10y as a ceiling...

 

gundlach has also been saying for the last 3 months to buy stocks...

 

agreed, with stocks up 10% and the 30 year at 3.1% vs 2.7%, this is no longer as good of a trade, but that doesn't make me a bull on the bond market.

 

completely agree - just an interesting trading opportunity perhaps, especially with the buoyancy in the equity markets and Europe.

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