Because bonds, like any other security, experience market fluctuations, it is possible to short sell a bond. 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 he or she 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.
Yes. Some of the most shorted securities are U.S. Treasury bonds. Why? Hedging is the answer. Many bond investors will short sell Treasuries to protect themselves in a raising rate environment. This is common with institutional investors that manage large portfolios of home mortgages with 30 year maturities, for example. Institutional investors will also "short" bonds through credit default swaps, but that is done synthetically and beyond the scope of your question. Anything can be shorted, but liquidity is needed within that market for a transaction to happen. Its near impossible to short bonds that are thinly traded or have no liquidity. I hope that answers your question.
It certainly is possible to sell a bond short, just like the process by which you sell a stock short. You are selling a bond that you do not own, so it must be borrowed. This requires a margin account and of course, some capital as collateral against the sales proceeds. There are interest charges for borrowing the security.
One other important provision. Just as an investor who is short a stock must pay the lender any dividends that are declared, a short seller of a bond must pay the lender the coupons or interest that is owed on this bond.
You may wish to consider using an inverse ETF. Inverse ETFs are designed to perform the opposite of the underlying index, though over longer periods of time, are not a perfect offset. Hence, inverse ETFs should only be used in the short term. Inverse ETFs are particularly useful for IRA accounts which are not allowed to use margin. The only way to employ a short strategy in an IRA account is through the use of an inverse ETF.
There are a large number of inverse Bond ETFs that are available that allow you to short bonds on the basis of maturity (20 year bonds versus 7-10 year bonds) or by credit quality (High Yield). The expense ratios tend to be much higher than their "long" counterparts because they require considerably greater effort and monitoring on the part of the ETF sponsor.
An example of such an inverse Bond ETF is TBF, the ProShares short 20+ Year Treasury ETF, which is among the largest of these with about $740 million in AUM and high average volume of over 700K shares over the last 90 days. But, management expense ratios are high at 0.93%.
There are inverse exchange-traded notes or ETNs, but we generally advise against these because they do represent credit risk that is associated with the issuer. There are lower management expenses associated with these (example, TAPR with a 0.43% management expense ratio), but as I said, there is credit risk associated with these.
Keep in mind that the prevailing wisdom for some time has been that rates are moving up. TBF has had only one positive return year (2013-the year of tapering) since 2010.
I hope that addresses your question.