selling a bond short

[twaddle]

Has anybody here ever sold a bond short?

The 5-year treasury is yielding 2.69%.

A 5-year CD is yielding 5%.

Why shouldn't I short the treasury and buy the CD?

Why shouldn't I short the 10-year at 3.5% and buy a house instead of getting a mortgage at 5% to buy a house?

Why do banks even exist if I can short low-yield treasury bonds?

Are these dumb questions? Good; tell me why.

 

[clifp]

Well I am sure you could short the Vanguard Short Term Bond index ETF BSV.

If you'd like you can place any type of financial interest rate bet you'd like to make via the financial future exchange.

Although I think shorting houses requires a quite a bit of sophistication.

 

[twaddle]

To clarify, I'm not talking about making a directional bet. Shorting a bond means you're borrowing cash and paying the bond interest. In theory, it seems that shorting a treasury makes more sense than borrowing money from a bank. I'm sure there's something I'm missing.

 

[clifp]

Well I hate to break it to you Twadde but as much as like you I am not willing to give you my money in return for your promise to give me 2.69% interest and your promise to give me original amount back in 5 years.

So you can not short a treasury directly because your credit rating isn't as good as Uncle Sam.

 

[brewer12345]

Its a problem of mechanics. If you short something, the broker will generally require that you leave the proceeds. Schwab won't even pay me interest on the proceeds of short sales, although institutions don't have to put up with that.

 

[FinanceDude]

Well I hate to break it to you Twadde but as much as like you I am not willing to give you my money in return for your promise to give me 2.69% interest and your promise to give me original amount back in 5 years.

So you can not short a treasury directly because your credit rating isn't as good as Uncle Sam.