US T-Bond Spread Betting
The current rate offered by IG Index for US T-Bonds is 14,230.9 – 14,234.9. They call this spread trading market “Treasury Bond Decimalised” under the US bond tab. Under the same tab you will see T-Notes for different periods of maturity, and these will generally be worth less the shorter the period. The long-term bonds themselves offer not only a return of capital, but many more interest payments before maturity, making them potentially worth more.
Suppose you think that the long-term interest rate will have to go down again to help stimulate the economy. In this case you would be “long” on the US T-bond, and want to bet that it will increase in value. You place a buy bet at £9 per point at a price of 14,234.9.
If you are correct, and the US T-bond increases to a price quote of 14,567.2 – 14,571.2, you might decide to take your profit while you are winning. You can close your bet at the selling price of 14,567.2.
You opened your bet at 14,234.9 and closed it at 14,567.2. Subtract 14,234.9 from 14,567.2, and you will find that you have gained 332.3 points on this bet. Your stake was £9 per point, which means you have won £2990.70.
Sometimes your bets won’t work out, and if the price of the US T-Bond had fallen, perhaps because interest rates rose, you would need to close your bet to mitigate your losses. Say the quote was 14,182.3 – 14,186.3 when you did this.
You opened your bet at 14,234.9, and this time you closed it at 14,182.3. The difference between these is 52.6 points. Multiplying this out by your stake, you find you have lost £473.40.
As another example, assume that you have done your technical analysis and decided that the US T-Bond will fall in price. Taking the original quote of 14,230.9 – 14,234.9, you place a short bet, selling at 14,230.9 with a stake of £13 per point.
In due course, suppose the quote fell to 14,115.2 – 14,119.2, and you decide to close your bet and take your winnings. The bet closes at the buying price of 14,119.2.
You opened your bet at 14,230.9 and closed it at 14,119.2. 14,230.9-14,119.2 equals 111.7, the number of points you have gained in the short bet. With a stake of £13 per point, you have won £1452.10.
Without wishing to discourage you, you will find that a number of your bets do not work out how you intend them to, and they go in the opposite direction. This is fine and normal, and the way that you handle it determines whether you win overall. What you must do is close your bets quickly once you realize that they are not going to work out. Say the price of the US T-bond went up to 14,263.7 – 14,267.7, you might decide that you have to close your bet and limit your losses.
Your bet was placed at 14,230.9, and closed at 14,267.7. That’s a loss of 36.8 points. Multiplying it out times your stake, you find that your total loss is £478.40.
How to Spread Bet the US T-Bond
The US Treasury Bond, or US T-Bond as it is sometimes known, is a long-term debt obligation issued by the US Government. It is a bond that is payable in more than 10 years time, up to 30 years. The Americans use different words for shorter term bonds, calling the medium-term from 1 to 10 years Treasury Notes, and the short term up to one year Treasury Bills.
All of these bonds are issued to raise money for the government, and in return the government promises to pay interest twice a year at a rate agreed and fixed when the bonds are issued. The capital invested is repaid at the end of the term, or maturity of the bond.
Because the short-term bonds pay back the capital sooner, they are relatively fixed in their values compared to the long-term bonds. The long-term bonds can vary a lot in their value, just because they become worth more or less to an investor depending what interest rate the current market is offering.
For instance, you might invest in a bond that was going to be repaid a long way in the future, but promised to pay you 4% return per year. Immediately after you buy it, you can probably sell it for the same price you paid. If you wait until next year, and the US government bonds offer a lower interest of say 3% per year, then you can reasonably expect that your bond will be worth more than what you paid for it. Investors will prefer to buy your bond from you, rather than buying new ones at a lower interest rate.
The opposite holds true. If in the future interest rates rise on bonds, then investors will not want to buy your bond from you unless you discount the price so that they get a more attractive return. Certainly, in the long run the bond holder will eventually get back the face value, but the further this is off in the future, the less importance this has to the bond price. This leads to big swings in the value of long-term bonds.
What you have in effect is a way of betting on long-term interest rates. It is important to note that these are not current interest rates, like the LIBOR or the US equivalent set by the Federal Reserve Board. The rates that affect the value of bonds are the long-term rates that are offered on equivalent financial securities or bonds. And most importantly, you must remember that a long bet, betting that the value of the US T-Bond is going to rise, is a bet that the interest rates offered on bonds are going to fall – the value of the bond is inversely related to the rate of interest.
While betting on US T-bonds is not widespread, it is interesting to be able to examine the consequences of economic decisions and possibly profit from any insight that you have into the future decisions of the U.S. Treasury.
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