Taking Stock: Shorting Treasury bonds

Malcolm Berko explains short selling, and how to do it with Treasuries via an exchange-traded fund.
Published: May 19, 2013
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However, there are three things we don't know: 1) When will rates rise? 2) How much will rates increase? 3) Will rates remain higher? So if you know the answers to two of the three questions, it might make sense to sell U.S. Treasury bonds short, and you might even make a profit. And the easy way to do that would be to purchase an exchange-traded fund called ProShares UltraShort 20+ Year Treasury (TBT-$65.50). Yes, I said “purchase,” not “sell short.” TBT came public in April 2008 and has assets of $3.4 billion.

Now, listen closely to how this works, because I'm only going to write it once: This investment (TBT) seeks daily investment results that correspond to two times the inverse (-2x) of the daily performance of the Barclays Capital U.S. 20+ Year Treasury Bond Index. TBT purchases derivatives that its advisers believe, in combination, should have similar daily return characteristics as two times the inverse (-2x) of the daily return of the index. And this index includes all publicly traded U.S. Treasury securities that have remaining maturities of at least 20 years. In this instance, if interest rates rose (meaning fixed-rate U.S. Treasury securities would fall in price), the market value of TBT would rise, and you'd be profitable. However, if interest rates fell (meaning fixed-rate U.S. Treasury securities would rise in price), the market value of TBT would fall, and you'd lose money. Cool beans! This certainly would be easier than borrowing U.S. Treasury securities and then repurchasing them.

TBT trades on the Big Board just like a stock, and because a growing number of investors share your feelings, this ETF recently has experienced some big cash inflows. Its 52-week range is a low of $56.32 and a high of $77.40, and the current $65.50 price could be an entry point.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com.

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