I am so tempted to short 30-year bonds right now. I might soon.
There are a few ways to represent this position:
1. Short bond futures (CME) – this is the world’s most liquid proxy to treasury bonds (other than dealing with the underlying product directly!). It has the advantages of liquidity and dealing strictly with the capital and not income component of the bond.
2. Purchase/short a liquid ETF that deals with long-term treasuries. There are a few to choose from:
- iShares 20-year+ government bond fund (TLT) – MER is 0.15%; average term of bond is 27.8 years – fund is highly liquid and shortable;
- Proshares Ultra/short (2x) 20-year+ (UBT/TBT) – MER is 0.95%; linked to TLT performance above as basis index. UBT is not very liquid, while TBT is very liquid.
ETFs have the advantage of being tradable in smaller amounts than futures (Future contracts are for $100,000 face value of product, which currently trade around 142% of par for the June contract). Futures typically have a spread advantage ($31.25 per $142,000 notional value), but liquid ETFs such as TLT have typically had penny spreads, resulting in comparable slippage. As previously mentioned the futures have an advantage with stripping the income-related aspects of the bond, and also tax advantages (both in the USA and Canada).