How to Short Sell Treasuries

Shorting Treasuries is a way to profit from rising interest rates.

Treasury securities are debt securities issued by the U.S. Treasury in a range of maturities from 30 days to 30 years. Treasuries are issued paying a fixed rate of interest so the market adjusts Treasury prices to reflect changing interest rates. Bond prices move in the opposite direction of rates. To profit from rising interest rates, one possibility is to sell Treasury securities short. As interest rates increase, the value of Treasuries will fall, producing profits on sold-short securities. Derivative products provide the easiest path to short the Treasury market.

Instructions

1. Select the maturity range of the Treasury yield curve to short. Lots of activity takes place in the seven- to 10-year Treasuries, and these maturities are the benchmark for interest rates of many types of debt securities. Long-term Treasuries -- 20 years or more -- will have the greatest value change in response to changing interest rates.

2. Pick a time frame for the holding period of your short Treasury trade. If rates are expected to rise quickly, in a week or less, take a more aggressive short Treasury position. If the holding period will be longer than a week, use a less aggressive, more stable product.

3. Buy shares of a leveraged, inverse Treasury security exchange-traded fund -- ETF -- if the value of Treasuries is expected to decline significantly in the next few days to a week. Inverse ETFs are designed to increase in value when the tracked security declines. The funds will have the words "bear," "short" or "inverse" in their names. Leveraged funds multiply the daily value change of the underlying Treasuries by a factor of two or three. These funds will include "ultra," "2X" or "3X" in the name.

4. Buy shares of an unleveraged, inverse Treasury ETF if your holding period is expected to be longer than one week. An unleveraged, inverse Treasury fund will increase in value each day the same percentage that the tracked Treasuries decrease in value. If Treasury prices rise, the inverse ETF share price will decline.

5. Monitor Treasury interest rates and your ETF share price. Sell the shares to lock in the profit when the interest rates of Treasury bonds stop rising. The inverse Treasury ETFs will earn no money if interest rates are not increasing.

Tips & Warnings

• Stock symbols of the available unleveraged, inverse Treasury ETFs are TYBS, TYNS, DTYS, DTUS, DLBS and TBF.

• Stock symbols of the available leveraged, inverse Treasury ETFs are DSTJ, TYO, TMV, DSXJ, SBND, TBT and PST.

• The Financial Industry Regulatory Authority -- FINRA -- warns that inverse and leveraged ETFs should be traded with caution and investors should understand the risks. FINRA strongly recommends against holding positions in leveraged ETFs for more than a few days.

References

• Index Universe: ETF Classification System
• FINRA: Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors
• "Smart Money": UltraShort ETFs Could Be Sweet for Bond Fans
• Barrons: Risky Business -- Shorting Treasuries