Is it possible to short a bond?

[whodey]

Just out of curiosity, I know there are many ways using derivatives to create synthetic short positions, but is it possible to actually sell bonds short like equities if you are not a dealer or market maker?



Edited 2 time(s). Last edit at Friday, June 27, 2008 at 12:50PM by whodey.

 

[JoeyDVivre]

It's surely possible to short a bond usually by providing funds in the repo market and then sell the bond. This works best for things like T-notes. Of course, the way that one goes short credit is to sell CDS protection on corporate debt.

 

[uhohcfa]

buy protection?

 

[Slash]

uhohcfa Wrote:
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> buy protection?

sell protection

 

[stokey99]

Slash Wrote:
-------------------------------------------------------
> uhohcfa Wrote:
> --------------------------------------------------
> -----
> > buy protection?
>
> sell protection

I would have thought that you would buy CDS protection. This enables you to lock in a premium that you need to pay every quarter in exchange for protection should the bond default. Hence it is in a sense short selling the bond and paying out the bond's coupon.

Because a corporate bond's price incorporates credit risk in the form of a spread over the equivelant risk free security (ie- T-notes), an increase in the credit spread of a corporate name would lead to a decrease in the underlying price of the bond in the cash market. Therefore, if you bought CDS protection the value of this contract would increase as the bond's price declines.

 

[cphilippou]

definitely buy protection (i.e. insurance)

 

[JoeyDVivre]

Geez - yeah, buy protection. What was I writing there? Good catch.

 

[daj224]

stokey99 Wrote:
-------------------------------------------------------
> Slash Wrote:
> --------------------------------------------------
> -----
> > uhohcfa Wrote:
> >
> --------------------------------------------------
>
> > -----
> > > buy protection?
> >
> > sell protection
>
> I would have thought that you would buy CDS
> protection. This enables you to lock in a premium
> that you need to pay every quarter in exchange for
> protection should the bond default. Hence it is in
> a sense short selling the bond and paying out the
> bond's coupon.
>
> Because a corporate bond's price incorporates
> credit risk in the form of a spread over the
> equivelant risk free security (ie- T-notes), an
> increase in the credit spread of a corporate name
> would lead to a decrease in the underlying price
> of the bond in the cash market. Therefore, if you
> bought CDS protection the value of this contract
> would increase as the bond's price declines.



exactly, look at what happen to lehman CDS