How to short the bond market

What does it mean to short bonds?

Shorting bonds means that you are opening a position that will earn a profit expect if the price of either government or corporate bonds fall.

Shorting is a form of trading, and it is made possible through financial derivatives such as CFDs. These products enable you to speculate on bond prices without taking direct ownership of the underlying market. As a result, you can use them to take a position on bonds increasing or decreasing in value.

Interested in trading bonds? Follow the steps below to get started:

1. Create or log in to your IG live account
2. Learn more about IG’s bond offering
3. Carry out your own fundamental and technical analysis
4. Take steps to manage your risk
5. Open, monitor and close your position

Alternatively, you could create an IG demo account to gain confidence in a risk-free environment, using $10,000 in virtual funds to explore how to short bonds.

Why do traders short bonds?

Generally speaking, there are two reasons why traders short bonds: to bet against the value of bonds, or to hedge their existing long positions.

Speculating against bonds

Traders will bet against a bond if they feel that its price is going to fall. Bonds might decrease in value if interest rates rise – because there is a negative correlation between interest rates and bond prices. Alternatively, they may fall because of rumours that the bond issuer is at risk of defaulting on their loans.

Learn more about the relationship between interest rates and bond prices

Hedging with bonds

Hedging with bonds is a way to reduce your overall exposure to risk on a bond position. If you already held a long position on a bond and you thought that a central bank was going to increase interest rates, for example, you might choose to short a bond to offset losses on your existing holding.

Hedging can be thought of as a form of insurance, in that you have to pay capital in order to set up a hedge, but those payments will be worth it if the market moves against you.

How to short bonds

Shorting bonds is made possible through financial derivatives such as CFDs. These enable you to speculate on the value of a bond without having to take direct ownership of it – meaning that you can go long and speculate on the price rising, or short and speculate on the price falling.

There are three main ways to short bonds with CFDs: by shorting bond futures, by shorting bond exchange traded funds (ETFs) and through going long on inverse bond ETFs.

Go short on bond futures

A futures contract is an agreement between a buyer and seller to exchange a bond for a fixed price at a predetermined future date. Shorting bond futures can also act as a hedge: locking in a price for an underlying market in the present for delivery in the future.

Go short on bond ETFs

Bond ETFs are exchange traded funds that invest solely in bonds. Often, an ETF will contain more than one type of bond to accurately mirror the overall price momentum of the wider bond market. You’d go short on bond ETFs if you thought that the price of bonds was going to fall – and you can use CFDs to open a position.

Buy inverse bonds ETFs

Inverse ETFs are designed to be negatively correlated to the underlying assets which they represent – meaning they will decrease with any price increases in the bond market. As a result, if you went long on an inverse bond ETF with CFDs, you would profit if the bond that the ETF was negatively correlated to fell in value.