German Bund Spread Betting
How do you go long or short of German government Bunds? Spread betting providers make a market based on Eurex’s Euro-Bund Futures and you can take a position on this. A protracted failure to deal with the eurozone crisis is likely to put downward pressure on all European bond markets, including Germany.
The current bid and offer prices for the German Bund are presently 13,681 – 13,684. The 13,681 is used when you place a short or sell spread bet, and also used to close a long bet, and 13,684 is the price for a long or buy bet, and for closing a short bet. The spread of just three points is about two hundredths of a percent, which is better than you will find with many spread bets on other financial securities. This means that you do not need the price to swing so far in your favour before you start to make a profit.
Assume first that you think that the German Bund will go up, which is the equivalent of thinking that the associated long-term interest rate is falling. You place a £7 per point long bet at 13,684. A little while later, when the price has gone to 13,913 – 13,916 you close your bet and proceed to calculate your profit.
- You opened your bet at 13,684
- You closed your bet at 13,913
- The difference between these is 229 points
- As your bet was £7 per point, you have won £1603.
Suppose things hadn’t gone your way, and that the price of the German Bund had fallen to 13,643 – 13,646. You could choose to close your bet and cut your losses at this point, and then you would be able to calculate how much you had lost.
- You opened your bet at 13,684
- You closed your bet at 13,643
- That means you lost 41 points
- £7 times 41 equals 287, and you lost £287.
For a second example, assume that you believe the interest rates will rise to attract international investors, and therefore the German Bund will fall. Using the original spread quote, you place a short bet for £13 per point at 13,681. As you watch, the value of the German Bund goes down until it stops around 13,453 – 13,456, at which point you decide to close your bet and take your profit.
- You opened your bet at 13,681
- You close your bet at 13,456
- That means you gained 225 points on your short bet
- At £13 per point, this amounts to £2925 profit.
Part of successfully spread trading is knowing when you must exit a bet, even if it is not in profit, just so you limit how much you lose. Perhaps in this case the price increased after you placed your short bet, and you decided you had to exit your bet when the spread quote is 13,712 – 13,715. You still lose, but you minimized how much you need to pay. Working out how much you lost: –
- You opened your bet at 13,681
- You chose to close your short bet at 13,715
- The number of points you lost is 13,715 less 13,681
- That’s a total of 34 points
- Your original stake was £13 per point
- Which means your total losses are £442
How to Spread Bet the German Bund
Just as the UK has Treasury Gilts, the bonds issued by government to fund its activities, so Germany has the “Bund”. The German Bund is a bond backed by the German government, issued at a fixed rate of interest for a certain term. Often the bund is compared to the US 10 Year Note, and the interest rates offered on them are similar, running around 2% at the moment.
The idea behind a government bond is that the government can borrow money which is repaid in full at a later set date, and for the period the government has the money the buyer receives regular interest payments, usually twice a year. It is regarded as a very safe investment, generally paying less than corporate bonds as there is always a chance that an individual company will fail and not pay back the money lent.
In the case of the German Bund, it is often been used as a bellwether for the European economy as a whole. Germany is the strong country in the European monetary system, and has recently been called on to intervene and prop up lesser economies.
The interest rates and term are fixed when the bonds are bought. As the available interest rate on new bonds may change over time, this can affect the value of existing bonds. For instance, if the interest rates go down, then investors will prefer to buy existing bonds which offer a higher rate, and this will have the effect of increasing their value. On the other hand, if interest rates increase in the future, then it will become harder to sell existing bonds and they will have to be offered at a discount to the face price in order to find buyers.
While interest rates are the prime mover in the price of government bonds, the German Bund has also been hit during the European debt crisis, and recent bond sales to raise more funds have been disappointing. This is because the German economy is regarded as the one that must pick up the pieces from other countries weaknesses, and prop up the euro. In the light of this challenge, investors are less keen to put their money into the German government.
The major point to remember when you are spread betting on the German Bund, or on any other government bond for that matter, is that the value of it will vary inversely to the interest rate. In effect, it is a way of spread betting on future interest rates, but when one goes down the other goes up. Having said that, you also have to understand clearly that the interest rate you are looking at is not the same as the daily bank rate, for example in the UK the LIBOR or interbank lending rate. This is because investors are comparing like with like, and looking at the rate they can receive on long-term bonds of various issue dates.
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