How can i short muni bonds

Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Because bonds , like any other security , experience market fluctuations, traders may be eager to profit from a bet that the price of a bond will go lower.

You can sell a bond short, but it can be trickier than shorting stocks. Short selling is a way to profit from a declining security such as a stock or a bond by selling it without owning it. Investors expecting a bear market will often enter a short position by selling a borrowed security at the current market price in the hope of buying it back at a lower price at which time they would return it to the original owner.

Short sellers in the stock market are usually concerned with their expectations of a company's future earnings the main factor determining stock price , whereas short sellers of bonds are most concerned with future bond yields , the determining factor of bond prices. Anticipating bond prices requires careful attention to interest rate fluctuations.

Essentially, as interest rates jump, bond prices tend to fall and vice versa. Therefore, a person anticipating interest rate hikes might look to make a short sale. To learn more about the factors that affect bond prices, read the Bond Basics tutorial.

Selling short can be a great strategy for making money in a market that is sluggish or declining. However, exercise caution before you jump into short selling bonds—or any other security, for that matter. It certainly is possible to sell a bond short, as you would sell a stock short. Like any other fixed-rate debt, municipal bonds have prices that fall when interest rates rise. If you aren't going to hold your bonds until they mature, you may want to hedge against falling prices. You also might want insurance against municipal bond defaults.

Traders use short selling to hedge price risk. To short a bond, you must borrow it from a broker and then sell it in the bond market. You hope to buy the bond back later at a lower price and pocket the difference. Without the ability to short municipals directly, some traders hedge munis by short selling Treasury bonds. A municipal bond exchange-traded fund, or ETF, sells shares backed by a basket of municipal bonds.

ETF shares trade on the stock exchange and are readily available for shorting. If you hedge individual bonds with an ETF, you run the risk that two might not move in lockstep. Also, you may have to hedge bonds from your state with an ETF containing bonds from other states, creating further potential mismatches. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest. It also can lead to higher interest rates and, in turn, lower market value for existing bonds.

Liquidity risk. Many investors buy municipal bonds to hold them rather than to trade them, so the market for a particular bond may not be especially liquid and quoted prices for the same bond may differ. Tax implications. Consider consulting a tax professional to discuss the bond's tax implications, including the possibility that your bond may be subject to the federal alternative minimum tax or eligible for state income tax benefits.

Broker compensation. Most brokers are compensated through a markup over the cost of the bond to the firm. This markup might be disclosed on your confirmation statement. If a commission is charged, it will be reported on your confirmation statement. You should ask your broker about markups and commissions. The background of the broker or adviser selling the bond.

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