John Jagerson

Profit From Inflation: 3 Ways to Short Bonds

    Tweet This

Free Trading Guides

2. Short Bond ETFs

Shorting an actual bond is complicated, and probably outside the scope or interest of most individual traders. However, shorting a bond ETF could accomplish the same thing with a lot less hassle.

As bond prices drop (due to inflation), bond ETFs will also decline in value. There are many bond ETFs to choose from, but the iShares Barclays 7-10 Year Treasury Bond Fund (IEF) is an ideal instrument for this short strategy.

However, what if you are not interested in the complexity of shorting a stock?

3. Buy Short Bond ETFs

There is an even easier way to take advantage of a decline in bond prices -- buy a short bond ETF. That means that the ETF itself is investing in short bonds, and by buying the ETF you will profit when bond prices drop.

For example, the ProShares UltraShort 7-10 Year Treasury (PST) is a leveraged ETF that has become very popular as a way to execute this strategy.

The Risks Involved With Shorting Bonds

There are some inherent risks in shorting bonds that you should be aware of:

1. Bonds are mean-reverting, which means that they don't "trend" for long periods of time. This makes your holding period fairly short term.

2. Leveraged positions using margin and leveraged ETFs include higher costs.