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I am talking about directly shorting bonds (i.e. excluding derivative instruments like CDS).

Why can I often short stocks and ETFs but not bonds? Is there something fundamentally different?

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  • Probably because most bonds are illiquid.
    – Flux
    Oct 7, 2020 at 0:54
  • @Flux Why can't brokers step in and provide liquidity like they do for other types of securities, then?
    – AlanSTACK
    Oct 7, 2020 at 8:57
  • @AlanSTACK Presumably because no one is paying them to. Market makers for stocks are "paid" to keep the market in stocks liquid (if not in cash, then in better trade execution, or the ability to reap the bid-ask spread).
    – TripeHound
    Oct 7, 2020 at 14:50

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It is possible to short bonds - you just need to find someone to borrow the bond from, someone to buy it, and keep track of where the interest payments should go. There's no "exchange" for bonds, so brokers would have to keep track of all of this, and there's not a big enough market demand to create the infrastructure for retail shorting.

Short Treasury ETFs, derivatives and CDSs may provide enough liquidity for bears to effectively short the two main factors for corporate bonds (interest rates and default risk) without having to keep track of coupons, margins, interest, etc.

If there were enough retail demand for shorting individual bonds, someone would step in and fill that supply gap.

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  • Sorry if this sounds naive, but is the infrastructure for creating such a platform really that high? Surely having a database and keeping track of a few variables (coupons, margins, interest, etc) cannot be so large as to eclipse an entire global market's appetite for short selling bonds? Do you have any insight on how much such infrastructure (or similar infrastructure) usually costs?
    – AlanSTACK
    Oct 8, 2020 at 5:28
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    @AlanSTACK It's not impossible, but it does have cost and would need a critical mass of supply to be profitable. I think you may overestimate the "entire global market's appetite for short selling bonds", especially when there's other established ways to short the two main factors for most corporate bonds. Like I said, if there were high enough demand someone would fill in the supply gap eventually.
    – D Stanley
    Oct 8, 2020 at 13:05

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