How to Bet Against the Bond Market

To bet against higher bond prices you need an investment that goes up when bonds go down.

To bet against higher bond prices you need an investment that goes up when bonds go down.

To bet against the bond market indicates that you think that interest rates will go higher and bond prices will fall. A decline in rates means higher prices, and that is a positive for the market. Depending on your risk tolerance and how much capital you want to lay on such a bet, there are several ways to play to win.

Prices and Yields

Changes in interest rates drive the price of bonds. An existing bond pays a fixed rate of interest, so to adjust the bond's yield the price must move up or down. When interest rates are going down, bond prices rise. To go against the bond market means you think rates will rise and bond prices are headed lower. When you watch the news about the bond market, be sure to understand whether the discussion is about rates or prices.

Inverse Treasury ETFs

Inverse exchange-traded funds own derivative securities that allow the value of one fund to move in the opposite direction of the selected type of assets. To profit from falling bond prices you can buy shares of an inverse ETF tracking U.S.Treasury bonds. Code words for inverse funds include short, bear or inverse. If an inverse fund has 2X, 3X or ultra in its name, the fund will change value at two or three times the daily price move of the selected Treasury bonds. You purchase inverse Treasury ETF shares through a regular brokerage account -- just as when buying stock shares.

Treasury Bond Futures

You may think futures trading is limited to commodities like corn, crude oil and coffee. However, futures also trade on financial products, including Treasury securities of several different maturities. Futures allow you to leverage your trading money, providing potential for the biggest gains from changes in the prices of bonds. Leverage can cut both ways, so the risk of loss is greater with Treasury futures. You need an account with a commodity futures broker and specialized trading software to bet against the bond market using futures.

Bond ETF Put Options

Put options are derivative securities that go up in value if the underlying stock goes down in price. To use puts for a declining bond market, you would buy put contracts priced against regular Treasury bond ETFs. Prices of these ETFs will go down when rates go up, and the put options will also go up. Puts give you the potential for large profits with only the money you pay for the options -- typically just a couple hundred dollars per contract -- at risk. To trade options you must ask your stock broker to add options trading authorization to your account.


About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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