Best method for shorting treasuries?

If you were inclined to short treasuries, which instrument would you use? Let’s assume you want to short the 10 year, though where to short on the yield curve could be discussed too. Even though I worked in fixed income, we never shorted, and I’ve never actually traded treasuries in my own account, so I need to think this thru… There is IEF (7-10yr ETF), and ZN (10-yr futures), and there might be others I don’t know about? The thing is these charts are totally different; IEF peaked in Jan, and ZN peaked last week, reason? There’s being short dividends to consider too, with ZN futures I assume there are no dividends, but need to take into account any cost of rolling the futures forward (looks like future structure is downward sloping). Oh, and then there’s TNX to make things more confusing; CBOE 10-Year Treasury Note based on 10 times the yield-to-maturity on the most recently auctioned 10-year, I guess you would long this one. Any in-house treasury shorting experts?

Presumably you’d do a currency swap with some Chinese bank. You keep the treasuries but sell the change in exchange rates. That would get you the front end of the curve.

If you’re not BSD enough to be a swap participant, go short ZN futures. If you are really expecting a crash, little niggling things like interest payments shouldn’t matter to your thesis, and just end up being carrying costs if you’re on the short side, anyway (Though they’ll probably reappear in the roll yield anyway).

as an adjacent question:

How did Bill Gross make his “short of a lifetime” shorting the bund during “OMG-Greece”? Anyone know what vehicle was used there?

^ That’s another thing I’ve been meaning to get up to speed on…there’s BUNL"DB German Bund Futures ETN"…

ZN it is then, even I am not BSD enough for swaps.

Christ, look at this over-complicated pricing system on ZN – “Points ($1,000) and halves of 1/32 of a point. For example, 126-16 represents 126 16/32 and 126-165 represents 126 16.5/32. Par is on the basis of 100 points”. WTF? I guess what they are trying to say it is priced at 6% coupon, so trading at 128 27.5 / 32 right now, so 2% or whatever yield. And their explanation on settlement is even more confussing, but it sounds like these settle with the delivery of actual treasuries, though only 3% of people actually end up taking delivery, and I wouldn’t be one of those 3% so doesn’t matter. One of these bad boys costs $128K, but barely moves your margin requirements.

Aside from the retarded pricing seems pretty rad.

I guess you didn’t do the CFA exams, where they go over how treasury futures assume a 6% bond as a standard unit and then have a table of cheapest to deliver existing bonds that are used for settlement.

Shorting bonds is trickier than shorting stocks because bonds have a maturity date that is constantly coming in at you while stocks have no maturity date. Futures also require that you have a standardized basket of something and that’s why they standardized on a 6% bond. Still, you are most likely to roll the position and cash settle so are likely not to ever take possession of a cheapest to deliver bond unless you forget to roll.

I had the entire Fabozzi book written to long-term memory for years. But derivatives? Forgot all that crap!

buy puts on OZN March 2016, strike around 120?

i’ll probably buy some other strikes later using limit orders…

Fixed that for you.

10yr has the highest liquidity.

since none of us will be delivering the bond at expiration, it’s pointless discussing the minutiae of the delivery criteria (sorry s2000).

and this chart shows why UB is not a good idea (and ZN is)

I’m seeing different yields (at below), but do see the high volume of the 10yr from your CBOT link. ~


looking deeper I see your point.

In july 2009 the 5yr note traded at 115. this corresponded to a 5yr rate = 1.66%

today the 5y 119.6 which is 1.37% (so a .29 move basically.)

buy feb 2016 options with 115 strike for $5. if the rates move 0.5% the payoff is about $3000. (contract multiplier is 10, so a $50 punt for a $30k payout in march).

This looks like an illustrative chart (showing the idea of how rate changes are likely to work their way through the yield curve) rather than a predictive chart claiming that these are actual estimates of what rates will be. So I wouldn’t read too much in to the idea that the rate here don’t match what you see at

For one, it shows a parallel interest rate curve change from 0-10 years, which is pretty unlikely to be truly parallel when rates change, and then a flattening of the curve from 10-30 years (which is plausible).

IIRC he used options, and even though he called it the short of the lifetime he wasnt even short, he had a stangle on I believe. He even came out after and admitted that he timed the trade right, but botched the execution. Levine did a write up on it a while back I will try and link


Oh ok got it.

That article was GREAT! Ha! short of a lifetime… more like wimp out of a life time! Looks like he set up a short position buy selling calls but actually thought the Bund wouldn’t do much so wrote a smaller weight in puts making position a strangle. So he WAS net short exposure, but not by much. My favorite part is when he goes bragging about his brilliant short and in unison the thing really DOES drop and his short puts end up biting him in the ass. Ha…nice try Bill!

so yea, PA… here is instructions on how NOT to short treasuries!!!

^ Bill Gross’s bund short strategy= hacksaw (did I use it right?)

not wishing to give away my own position, but someone just bought 2000 puts, strike 114.5 and 4000 at 115.75, and 2000 at 115.5, and 2000 at 117

it’s been pretty quiet (and lonely) down here, but looking interesting now…

(march 2016 puts on 5yr treasuries)