Best Way to Short Bonds

 

 

 

 

Best Way to Short Bonds

Adding to Shorter Term Positions to Our Long Term Treasury Bond Short:

Due to these shifting fundamentals, we are once again dipping our toe in the “short bond” pool and are buying a basket of TBT, SJB and KRE (Long Bank ETF). TBF is the unleveraged version of TBT and for those who can’t/won’t do leveraged ETFs, that’s a decent option.

There are many other “short bond” ETFs that I think are good products, including DTUS (iPath US Treasury 2-Year Bear ETN), STPP (iPath US Treasury Steepener ETN), and PST (ProShares UltraShort 7-10 year Treasury) but the first two trade with very low volume (which is a shame because the 2 year will get hit as the FOMC hikes rates and the curve will steepen materially), while the third has volume but in a rising rate environment, given the unnatural flattening of the curve over the past six months, the “back end” of the curve will play catch up more than the “belly” (so being short 30 years will produce better returns than being short 7-10 years bonds).

I mention these because if you can take the volume risk, they are good products that will profit as bonds decline—but given they are “trade by appointment,” I’m not going to materially feature them in the Report, because they won’t be appropriate for most clients.

We are indeed “once bitten, twice shy” on this trade so we will start out allocating just 1/3 of our target to it—with a stop at the respective recent lows. And, I am acutely aware that a “Grexit” could create another wave of money into Treasuries that will again overwhelm negative domestic bond fundamentals.

As a result, we will be cautious at first, and look to add to this strategy once we have a profit.