Spread Betting the BTP Italian Bond Contract
If you’d like to bet on some European bonds, you could look at the long term BTP spread betting contracts available from IG Index. These are Italian-based government bonds which have an interesting history. The BTP bonds were quietly retired in 1999 when most of Europe took on the euro as its currency. BTP stands for Buono del Tesoro Poliennale, a multiyear Treasury Bill.
Following the global economic crisis, Eurex, the European derivatives exchange operated by Germany and Switzerland, decided to resurrect the concept and offered long-term (10 year) Italian bonds in September 2009. These are denominated in euros rather than the lira of the previous BTP contracts, and provide an alternative to the safety of German bonds, offering a higher interest rate.
They were a success, with trading volumes breaking all records. Subsequently Eurex has issued BTP contracts for different terms, such as a short-term 2 to 3 year, and a midterm five-year bond.
You can see that the price has varied a great deal around the notional 10000 that they will be worth on expiration. Although bonds are regarded as a safe place to store money, with a guaranteed return on maturation, the capital value of them varies according to interest rates that are currently available elsewhere. If current interest rates are higher than those attached to the bonds, then no one would buy the bonds unless they were at a discounted price. If current interest rates are less, then bonds will sell at a premium price.
A further variable in the equation for BTP bonds is the safety of investing in the Italian government. There have been questions about the stability of the Italian (and Greek) economies. It is hard to conceive how the situation could develop that the Italian government would default on the bonds, and yet continue to be part of the European Monetary Union, yet many Germans have expressed their distaste that the German economy and consequently the taxpayers could be involved in rescuing the economies of the weaker European economies. Notwithstanding that question, such bonds are backed by the Italian economy and government, which suggests that only a catastrophe could cause a default.
As you can see, there is little track record for these bonds, as they have only been offered for a few months. The daily chart shows that there is little volatility from day-to-day, as the candles are fairly short. The price gap a few months ago was a period when the prices were not reported, as you can see from looking at the time scale. The bond pricing is what you might expect, as only large shifts in interest rates or in countries’ fortunes should make much difference to the delivery. Bonds are unlike shares in this respect, as they have a definite target value that will be achieved at a certain date. The fact that these are longer term adds to the volatility, but inevitably the known final value provides some price stability.
Spread Betting on BTP Italian Bond Contract
The current price for the long-term BTP contract, a futures based bet expiring next month, is 10,283 – 10,287. This is the only type of bet available on this financial security. If you think that it will fall in value, then you can place a short or sell bet for, say, £4 per point at the selling price of 10,283. One of the things that makes a bond to fall in value is if interest rates in general rise, as then the bond must be discounted in order to sell with its lower interest rate.
If you are correct, you might see the price go down to 9632 – 9636 and decide to close your bet and collect your winnings. Your spread betting broker will tell you how much you won, but if you want to work it out for yourself it is easy to do: –
- Your short spreadbet was placed at 10,283
- Your bet was closed at the buying price of 9636
- The number of points you gained was 10,283-9636
- This works out to 647 points.
- With a bet of £4 per point, you have won £2588
Whenever you place a bet you should have in mind a losing price level that you won’t go beyond – if the price goes the wrong way, putting you in a losing position, then you must know when you are going to call it a day and accept your loss. Say the price went up to 10,344 – 10,348, and you decided to close your bet and minimize your loss.
- Your short spreadbet was placed at 10,283
- Your spread betting trade was closed at the buying price of 10,348
- The number of points you lost was 10,348-10,283
- This works out to 65 points.
- With a spread bet of £4 per point, you have lost £260.
For a second example of a spread bet on the BTP, say you were bullish about this contract, and on the original price quotation of 10,283 – 10,287 you decided to place a long bet for £2 per point. If the price went up to 10,631 – 10,635, you could close the bet and make a profit. Here’s how much you made: –
- You placed a long spreadbet at 10,287
- Your spread bet closed at 10,631
- Therefore you won 10,631 less 10,287 points
- That works out to 344 points
- You bet £2 per point
- You have won 344 times £2
- Your profit is £688.
Once again, you must have a losing position figured out, and be prepared to cut your losses and close your bet. Say it dropped to 10,233 – 10,237, and you closed your bet.
- You placed a long spread betting trade at 10,287
- Your spreadbet closed at 10,233
- Therefore you lost 10,287 less 10,233 points
- That works out to 54 points
- You bet £2 per point
- You have lost 54 times £2
- Your total loss is £108.
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