Is it possible to sell short Treasury Bonds as an alternative for getting a loan?

Question

Since it's so hard trying to get a good interest rate as a young adult with no credit, I was wondering if you can sell short Treasury Bonds which can have easier interest rates.

Answer 1

You can sell them short "against the box", which means that you must own them first; but to do it you must have a contract that states the short sale will not be closed except by your own timing (that is, not involuntarily against you by the other person). Or you could use collateral (about 150% of what it is that you are trying to use as an investment as the banks and brokers will only loan about 70% of the value - perhaps even less). The only way to sell them short without collateral is to be a multi-millionaire with the ability to borrow just by personal signature.

I would suggest considering the futures market where you can go long or short one (or more futures contracts) as you wish. The thing with Futures (and Commodities) is that you must NOT use leverage as that is the one thing that wilil lead to your ruin and where you may wind up owing money beyond any that you may have lost when the position gets closed against you by your lack of ponying up additional "good faith" money. But the catch-22 is that if you do go to all cash, then in a sense you'd have to pay up the equivalent amount as if you had bought the T-bill itself.

Perhaps you could get around this by listing a parent/relative with a net worth above $250k in a joint commodities account - that's to go to all cash but unnecessary if they wanted to use margin and could afford to put in additional good faith money if the position goes against you - but I'd advise against that as there is no telling how angry a relative might get if things get nasty which, in my experience, they generally do before they straighten out. This other person on your account will be expected to provide hard assets subject to lien and sale(s) at distress prices at the whim of the lender if things get out of hand so be careful!

But IMO the best solution would be to use futures options which give you the right but not the obligation to consummate either a sale or purchase of a T-bill. This means that if you buy a T-bill "PUT" you'd have the right to sell (or "put" to the Market) the T-bill at a higher price than where it was actually being traded and make a profit on the difference. Example: the T-bill goes down 5% and you profit by the amount of (100%-95%)/95% less the cost of buying the PUT in the first place, so as compared to just shorting the T-bill and making 5%, you could wind up with 250-plus percent on the same move as you have all the profit with a minimum PUT contract cost (about 2-5% of the cost of what selling a T-bill short would add into your commodities account). So the upside is that if T-bills go down you'd make a leveraged profit, while if T-bills goes up, ruining your investment, the PUT would just expire worthless (that is, you would let it expire because it has no value - you can't profit on a short sale if the investment goes up, can you? - hence the PUT option has no value, hence you wouldn't exercise it and you couldn't sell it back to the Market because it has no value at that point in time).

So options are a way to decrease risk because if the invesment goes south, there is a finite loss that is much less than if the investment goes against you in a futures contract, while given the same amount of movement downward the profits on the option are way better than just a short sale. Caution - do NOT buy 25 or 50 PUTS just because you can - that is just as bad as shorting the T-Bill as you will lose all your money if things get nasty. Treat Options as a spice and pretend that you are investing with real cash, so that, for example, if a short sale would require $50,000 good faith collateral, do NOT buy more PUTS than about 5% as much money as the real thing would take; so in this hypothetical 50K good faith you'd be able to buy about 5% times 50K, or $2,500 - even that is an extreme amount and I would advise you to keep it smaller. Why? Just look back to 9/11. I personally was in the Market heavily and had about 100K in options at the time in all kinds of stock, but mainly CALLS (right but not obligation to SELL higher than price at which the stock had been trading when the option was purchased - a device to leverage profit with the benefit of capped losses - CALL= "Calling away from the Market"). To hedge myself I had a lot of Dow and S&P PUTS (profit if there's a crash). After 9/11 when the market crashed I got out with almost no loss at all - perhaps about $500 because I had hedged myself with most trades taking 85% losses and the PUTS quintupling. That was a lesson I never forgot and I eventually changed my strategy to never go above about 15k total in only 10 trades at a time or 1% of net worth in any single trade. That way if something goes down 100% you still have 99% left.

Good luck.

Answer 2

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Answer 3

I think you need to re-think your question.

Yes, you can short T-bills as to the rest of the question it does not compute?