• Giorgio Tavazza

How to make money shorting bonds: 4 ways

Here below is the script from the Youtube Video entitled: How to Make Money Shorting Bonds

You can watch the video by clicking here

PART 1 - Why short bonds?

Now, the first question should be: Why would you want to short bonds?

And you would short bonds if you thought that bonds prices would fall.

Michael Burry, the guy from the Big Short movie, is saying that bonds are in a bubble and he specifically thinks that 30 years Treasuries are mispriced and could crash soon.

Another great mind that doesn't like bonds right now is Ray Dalio, the founder of the biggest hedge fund in the world, who says:

"The economics of investing in bonds (and most financial assets) has become stupid." And not only that, he also published a Linkedin article entitled "Why in the World Would You Own Bonds"

So clearly, many great minds are bearish on bonds right now, and the reason is simple: at the current rate of inflation, bonds are highly mispriced, meaning their prices need to go substantially down to reach fair value.

Right now, if you lend money to the US government for any amount of time, you are guaranteed to lose purchasing power as the inflation rate is higher than the interest you would receive. In other words, you are paying to lend your money to the US government.

As I have discussed previously on this channel, interest rates will go up, which means that bond prices will go down as interest rates and bond prices are inversely correlated.

And falling bond prices bring us to the main topic we are discussing today: how to make money shorting bonds.


Now, the first way you could make money shorting bonds is by buying put options on TLT, which is an ETF that holds long-term treasuries. Buying put options is risky as you have to be right before the option expiration to make money and therefore you need somehow to time the market. Fortunately, there are quite a few things you can do to stack the odds in your favor.

The first thing is to choose long-term options that expire in one year or more, as you have more time to be right. The second thing that you can do is to buy the options with a strike price that is ATM which means that is closer to the current price and therefore has a higher probability of profit compared to deeply out-of-the-money options that have little chance of expiring in the money. You could also buy ITM put options that would give you actual intrinsic value and therefore lower risk and a better breakeven.


now, another way to make money with falling bond prices is by selling call credit spreads on TLT and I like this strategy more than buying puts because time decay is in your favor when you sell options, plus you receive cash for doing it. Your max profit is limited to the cash received in the call credit spread and your max loss is limited to the width of the spread minus the credit received.


Moving on to the third way to make money shorting bonds, you can buy inverse leveraged ETFs like TBT or TTT. They replicate the inverse return by 2x TBT and by 3x TTT of the 20 years plus treasury bond index. This means that if TLT goes down by 1% you should expect a gain of near 2% in TBT and 3% in TTT. These ETFs are really dangerous as they accurately achieve the daily inverse return of TLT and do not work for long-term time frames as they have high rebalancing costs that drive the price down with time.

So if you felt like bonds are going to crash in the next month or two, you could buy TTT or TBT and make a fantastic return. However, if you thought that bonds may crash in the next 24 months, I wouldn't touch the inverse leveraged ETFs as your initial capital would get destroyed and you may lose money even if you are eventually right at the end.


And finally, the fourth way you could make money with falling bond prices is by buying the Simplify Interest Rate Hedge ETF or PFIX. This ETF gives you optionality as it holds long-term put options on bonds that usually are available only to institutional investors. For example, right now PFIX holds puts that expire in 2028 that you wouldn't normally buy in the market. Moreover, to offset the decay of the options, PFIX also holds some treasuries in its portfolio. The result is that this ETF provides interesting optionality with gains as interest rates increase and bond prices decrease while minimizing time decay.

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