Shorting a bond means borrow it form other and sell. It seems to me that this operation is the same as just simply issue a bond. Am I right? If yes, then why do we use "shorting" terminology for bonds? If no, why am I wrong. Thanks!
2 Answers
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Two important difference are 1) the intention 2) the resulting position
Shorting a bond is usually with the intention to buy it back with hopefully a lower price. Your position is sensitive to the bond price changes.
Issuing a bond (usually an organization) is usually for raising funds. And you have no risks on bond price fluctuation and it will be redeemed on principle at maturity (assuming non-callable)
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When a bond is issued an entity $A$ creates a debt instrument and makes it available for sale.
When a bond is sold, $B$ sells an existing debt instrument to $C$ (who buys it). $A$ doesn't have to be any of the entities $B$ or $C$.
answered Sep 27, 2019 at 15:15
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$\begingroup$ Thank you for your answer. If $A$ agent issue and then sell the bond, it means that $A$ has the obligation to pay back cash flows generated by bond. The same obligation has $A$ if s/he short sale the identical bond. Doesn't this imply that those two strategies are the same? $\endgroup$– saneSep 27, 2019 at 15:23
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1$\begingroup$ If you can borrow the bond for free and all goes well from a pure cash flow perspective: yes. But as Kola points out, the intention will be different. Also, the legalities in the case of a potential default of $A$ are different. $\endgroup$– Bob Jansen ♦Sep 27, 2019 at 15:34