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Hi. In the text it reads that with STIRs, if you are borrowing you should sell futures.
Why is it that with bond futures an investor (who is lending and not borrowing) and should sell bond futures as well. I would think that as an investor you should buy bond futures (the opposite of STIRs)
If you are borrowing money from the bank you fear interest rate rises, eg 3% to 5% so to generate a compensating profit you sell futures now at 97 (ie 100 – 3) so that you could buy later at 95 if interest rates rose.
An investor in bonds is not really either borrowing or lending. They are operating in a secondary market where they can buy and sell bonds just as you would buy and sell shares. If interest rates go up bond prices fall. eg 97 down 95. Future prices track bond prices so if bond prices fall, future prices fall too. Therefore to compensate for a potential fall in bond prices, sell futures now at 97. Later you will be able to buy at 95.
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