How to Sell Short Bond Funds
Investors in bond funds are not buying bonds directly, they purchase equity shares in the bond fund. As such, any investor in such a fund can short sell their shares just as they would that of a conventional stock. Bonds themselves can also be sold short. Short selling is a process in which the investor borrows shares on margin, sells them and then repurchases them to re-sell to the broker that lent the shares, ideally at a lower price.
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Instructions
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Select the bond fund that you would like to short. In most cases, bonds decrease in value when interest rates rise. In addition, bonds decrease in value when the bond ratings decline due to financial difficulties on the part of the issuer. If you're conducting fundamental analysis on a bond fund, you'll need to take a look at the component parts of the fund and make an independent judgment on what direction you expect the price of the fund to move. Investors using technical analysis will respond primarily to price indicators on the bond fund to decide how to use their funds.
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Order a short sale of the bond fund from your brokerage. You need to have a margin account with your brokerage to make short sales. The brokerage will then find another holder of the bond fund shares, and lend them to you on margin. You then sell the shares. This process is entirely automated by modern brokerage systems once you place a short sell order.
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Decide when to close your short position. You can only turn a profit on a short sale of a bond fund if that fund declined in value since you first opened the position. If the shares raised significantly in value since you first started the short sale, you may be subject to a margin call from your broker. When you decide to exit your position ("cover your short"), you buy the shares at the current price and then return them to the broker. If the shares declined in price since you entered the position, you will earn a profit on the trade.
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