Can You Invest Against the US Treasury Bonds to Make Money?

by Lisa Bigelow, studioD

The United States has been and continues to be the world's safest investment bet. Despite the August 2011 downgrade of its debt by Standard and Poor's, United States Treasury bonds are still the "gold standard," flight-to-quality instrument used by professional investors worldwide. While investors who wish to bet against treasuries have opportunities to do so, be advised that the Federal Reserve indicated that its overnight rate will stay low through mid-2013.

Buy Options on Treasuries

Puts and calls are derivative instruments that allow an investor to place a bet on the future price of a stock or bond. A bearish play on treasuries requires the investor to sign an options agreement to sell calls and buy puts; it also means that the investor believes that interest rates will rise. When an investor sells a call, it means that he believes the market will not be higher than the bond's current price when the call expires. Buying a put indicates that the investor believes bond prices are going down. Buying a put is less risky, because the investor only stands to lose his initial investment. Naked call writing is the most dangerous.

Exchange-Traded Funds

An exchange-traded fund that's made up of bonds trades on an exchange just like a stock. As a result, the price of the fund can go up or down. The investor who is betting against treasuries can "short" an ETF long bond fund. "Shorting" means the investor borrows the fund in the anticipation of buying it back at a lower price in the future. Alternatively, the investor can buy an inverse-ETF bond fund. An inverse fund is already betting that the market is going down, and eliminates the need for the investor to make the short bet.

Shorting Treasuries

A specialized bond broker can set up an account that allows the investor to short treasuries; the garden variety investment account usually can't accommodate this trade. Just like shorting a long bond ETF, this investor borrows treasuries now anticipating she'll be able to buy them back cheaper in the future. Remember that the investor who makes this bet believes that interest rates will rise; if interest rates remain the same or fall, the investor will lose money, in addition to making the interest rate payment.

Getting Advice

Because investing against United States Treasury bonds is a risky short-term bet due to the Federal Reserve's stated intent to keep interest rates low through mid-2013, investors are well-advised to seek professional advice before using these strategies. Many professional investors have lost tidy sums making poor derivatives and short bets. While other options exist -- currency plays on the dollar are another alternative -- the inexperienced investor should carefully consider how much of his portfolio he wants to risk by making this bet.

About the Author

Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.

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