Can You Invest Against U.S. Treasury Bonds to Make Money?

U.S. Treasury bonds may be safe investments, but you can still profit from a decline in their value.

U.S. Treasury bonds may be safe investments, but you can still profit from a decline in their value.

Investors have long considered U.S. Treasury bonds as being among the world's safest investments because they are backed by the full faith and credit of the U.S. government. Treasurys fluctuate in price like any other bonds, and prices decline if interest rates rise because the old rates paid by existing bonds are less attractive to investors than new issues with higher rates. If you want to bet against Treasurys, you have several options.

Short ETFs

Probably the simplest way to bet against U.S. Treasury bonds is to buy shares in a "short Treasury" exchange-traded mutual fund. This is a professionally managed pool of money with a focused investment goal: to profit from a decline in the market value of Treasurys.

Put and Call Options

The options market offers another alternative. Options are contracts to buy or sell a security at a specific price, until a specific expiration date. A "put" is a contract to sell; if the security falls in value, the put value rises. You can buy puts on Treasury bonds as well as on exchange-traded bond funds that rise along with the price of Treasurys. You may also buy call options on the 30-year Treasury bond interest rates. If rates rise (which will cause Treasury prices to fall), then the call options increase in value.

Futures Contracts

A futures contract is similar to an option, with a specified contract price and expiration date. Traditionally, investors have used futures to hedge against unfavorable swings in the price of a commodity, such as crude oil. If you open a futures trading account with a qualified broker, you can also sell a futures contract on Treasury bonds. A single futures contract has a face value of $100,000. Prices of the contract are quoted in "points" worth $1,000. When you tell your broker to sell the futures contract, you must deposit sufficient margin to cover potential losses in the trade. As of March 2013, the initial margin deposit minimum on Treasury bond futures was $3,375. If the contract falls in value, you can then order a "buy" to close the trade and collect a profit. If the futures contract rises, however, you will take a loss.

Shorting Bonds

A short sale takes place when you sell borrowed securities, hoping to profit from a fall in their value when you eventually buy them back. You can short U.S. Treasury bonds by borrowing the bonds, selling them on the bond market, and waiting for a decline in the price of the bond. If your strategy succeeds, you will profit when you buy back the bond and the trade is closed. You can short bonds through a broker that offers this service, but you will have to be approved for short selling. Take into consideration the fact that you will have to pay interest to the other party in this transaction until you close the trade.

About the Author

Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.

Photo Credits

  • Thinkstock/Comstock/Getty Images