5

Let's say I have a diversified investment portfolio, and I wish to tap a relatively small amount of cash (less than 5% of the portfolio's value) without liquidating any of my positions.

I could borrow on margin, but rates are presently 6% - 8%, which is unattractive.

Wouldn't it make more sense for me to short-sell treasury bonds instead? With rates below 1% for the shorter-duration bonds, my borrowing costs are much lower (as I understand, I would be paying the interest that the bondholder would ordinarily receive, instead of paying margin interest to the brokerage)?

There is the risk that the bonds would appreciate in value, but given that interest rates are currently about as low as they can go, this would be extremely unlikely (and even so, the change in value would occur very slowly).

Are there any risks/disadvantages that I'm overlooking?

7

Selling short in brokerage accounts doesn't work that way for the regular client.

Ask your broker what it will cost you to short the treasury if you remove the cash you think you'll get. You will probably wind up showing money borrowed and charged margin instead of the credit you expect.

If your proposal worked, anyone can short in their brokerage accounts and pay zero interest to borrow short term. It's not this easy.

  • 1
    Yes, it appears that the proceeds of the short sale are held by the brokerage and I wouldn't be able to withdraw those funds. Thanks. – Tony the Pony Feb 13 '12 at 14:31
  • 1
    The broker uses the short-sale proceeds to collateralize your loan of the securities you shorted. – QuantumMechanic Mar 24 '14 at 0:01

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