John Jagerson

Profit From Inflation: 3 Ways to Short Bonds

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We have advocated a long-term, diversified approach as the investing methodology that will produce the best results for the majority of your portfolio for a long time. However, mixing some shorter-term positions, options strategies and even a few speculative bets into your portfolio can often improve your overall returns and reduce portfolio volatility.

The current market environment is the perfect example of why investors need to be thinking about investing strategies beyond a generic buy-and-hold methodology. (Learn more about strategic diversification.)

The economy in late 2008 and early 2009 has been in a tug-of-war between the threats and serious risks of deflation and the disadvantages of high inflation. (See Investing for Inflation vs. Deflation.)

The extraordinary deficits planned by the U.S. government and the massive intervention in the U.S. Treasuries market by the Fed to fight deflation have shifted investor expectations more toward high inflation over the next several quarters.

Savvy traders observing this shift toward inflation expectations are likely getting their inflation-based investing plans ready to deploy. When traders talk about opportunities in a market like that, they will often mention short bonds or Treasuries positions.

There are three ways investors can go about this:

1. Short Bonds

A short bonds position has the potential to produce big profits during high inflationary periods, but how does an individual trader do that within their regular stock account?