Spread Bet Markets: Government Bonds

Spread Betting on Long-Term Interest Rates

Now just to make things a little more confusing for you, I am going to throw Long Term Interest Rate Futures at you. Long Term Interest rates are reflected in the price of government bonds. Bonds, or fixed-income securities, bonds are similar to shares in that a government or company will issue them as a form of raising money. But they are unlike shares in that they must be paid back at some definite date in the future.

One of the other key differences between bonds and shares is that the investor in shares is a part owner of the company, but an investor in bonds is a lender to a company or government. The investor has bought debt that is owed to them, which should be repaid on the redemption date.

Bonds are generally considered to be safer than shares but their absolute value can never increase: £1m of bonds issued will be redeemed with £1m of cash on expiry. However, bond prices will rise and fall according to the current level of and the future expectations for interest rates.

Government Bond Futures allow you to trade on the long term rise or fall of interest rates from around the globe. All you have to remember is that BOND prices rise when interest rates fall and vice versa when interest rates rise and Bond process fall. So we either buy (LONG), or Sell (SHORT) on that particular country’s Bond.

For instance, Ayondo provides quotes for bond markets based on the current front quarterly futures contract on the major government bonds traded for the UK, US and Germany.

Bond Spreadbet

Example of a Bond Trade. You can trade bonds at Ayondo

Your automatic stop loss would be placed at 80% of the maximum CGSL. The maximum CGSL for BOBL Sep is 100, so the stop loss would be placed 100 x 80%=80 points away, i.e. at 114.31. The Margin Requirement would be 100 x £5=£500.

You would be able to move your stop loss nearer, which would free up additional Trading Resources or you could move it further away, which would reduce your Trading Resources. In this case, you have £250 of Trading Resources so the furthest you could move the stop loss would be another £250 x 80%=£200, which at £5 per point puts it 40 points away, i.e. down to 113.91.

However, inflation numbers released in Germany are worse than forecast and as a result expectations increase that the ECB will raise rates. So the price of the BOBL falls and you decide to close your trade for a loss:

Remember that with spread betting you do not actually own (if you are long) or owe (if you are short) the underlying asset. You are simply trading on the price of the market.

Example of closing a bond trade

Now I don’t want you to think that this is getting way too hard. I am just showing you the various trades that you can make. You can also trade Options but I won’t go into those and will leave that for another time. Your main ‘Bread & Butter’ will be earned trading using share prices, which are quick and simple to trade and follow. The other trades I am listing here are merely for your reference, so when you invite your bank manager around for dinner in your new house, you can sit smugly as he tries to blind you with his knowledge – or lack of knowledge.

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