If you’re ready to open a position in the bond market, follow these three steps:
1. Take the decision to trade
Decide whether you want to speculate with derivatives.
2. Select your opportunity
Choose from our offering of government bond futures.
For more info about how to trade in the bond market, discover everything you need to know in this guide.
What are bonds?
A bond is a financial instrument that works by allowing individuals to loan cash to institutions such as governments or companies. The institution will pay a defined interest rate on the investment for the duration of the bond, and then give the original sum back at the end of the loan's term.
As bonds are ‘negotiable securities’, they can be bought and sold in the secondary market. This means that investors can earn a profit if the asset appreciates in value, or cut a loss if a bond they sell has depreciated. Because a bond is a debt instrument, its price is highly dependent on interest rates.
Types of bonds
Broadly speaking, bonds are issued by governments and corporations. With us you can trade in government bonds.
While all investment incurs risk, sovereign bonds from stable economies are regarded as being among the lowest risk investments available. In the UK, government-issued bonds are known as gilts. In the US, they’re called Treasuries.
Although high-quality bonds from well-established companies are seen as a conservative investment, they still incur more risk than government bonds, and pay higher interest as a result. The credit risk of corporate bonds is evaluated by ratings agencies like Standard & Poor’s, Moody’s and Fitch Ratings.
Learn more about bond trading
Bond trading is one way of making profit from fluctuations in the value of corporate or government bonds. Many view it as an essential part of a diversified trading portfolio, alongside stocks and cash.
With us, you´ll trade on changes in bond prices using CFDs - a type of leveraged derivative. This means that, when trading, you´ll never take ownership of an actual bond. Instead, you´ll take a position on the bond futures market either rising in value or falling.
Your profit or loss will depend on whether you correctly predicted the direction of movement, how much the market has moved, and the size of your position.
But, please remember that all trading incurs significant risk. This is only amplified when trading on leverage. Learn more about how to manage your risk.
Our current offering includes the world’s leading government bond futures markets. Because our CFDs are issued off-exchange, you can deal in fractions of contracts.
Pick your bond trading strategy
When implemented correctly, hedging can be seen as a way to mitigate your losses should the market turn against an investment you’ve made. It’s achieved by strategically placing trades so that a gain or loss in one position is offset by changes to the value of the other.
Any strategy adopted when hedging is primarily defensive in nature – meaning that it’s designed to minimise loss rather than to maximise profit. But, hedging should be approached with caution. To hedge an existing position in the bond market, you could use CFDs to short-sell the bond futures market.
It’s important to note that derivatives like CFDs are leveraged, which means you stand to lose more than the margin amount you deposited to open a position. Short-selling is also a high-risk trading method as your losses could, theoretically, be unlimited.
Speculating on interest rate changes
Owing to the inverse relationship between bond prices and interest rates – ie as interest rates rise, so bond prices fall, and vice-versa – bonds enable you to speculate on interest rate movements. With us, you can do this by taking a position in the government bonds futures market using CFDs.
If, for example, you think interest are set to rise, you could adopt a short position by selling the market. Conversely, if you think rates will decrease, you could go long and buy the market.
As above, please note that CFDs are leveraged, which means that you stand to lose more than your initial deposit.
A popular strategy to consider when trading government bond futures is the Five Against Bonds Spread (FAB). Here, you would adopt two opposing positions in bonds with differing maturities to profit from the relative mis-pricings in their spread (you would short-sell the maturity you believe to be overpriced and buy the maturity you believe to be under-priced).
Go to our bonds platform and open an account
Once you’ve chosen to trade government bond futures open a CDF trading account.
Our cutting-edge trading platform has been awarded year after year2. Built around your needs, our web and mobile platforms are a faster, clearer and smarter way to trade.3
Alternatively, use our demo account to develop your trading skills and master our award-winning platform for free. 2 Because the demo simulates the live environment, you’ll be familiar with the platform when you create your live account.
Take your bond trading position
Techniques for trading bond futures
- Going 'long' on lower interest rates
- Going 'short' on higher interest rates
- Hedging against inflation
- Hedging against interest rate risk
When interest rates drop, bonds become more desirable, and their prices rise. If you believe this will be the case, you’d adopt a ‘long’ position on your chosen government bond futures market. When going long, you elect to ‘buy’ a derivative to open your trade.
To close your trade, you’d then ‘sell’ the derivative. Should the price of the government bonds futures contract increase, you’ll earn a profit. Conversely, should the price decrease, you would cut a loss.
Before trading with leveraged derivatives like CFDs, remember that they’re complex instruments and that losses can accrue rapidly.
When interest rates rise, bonds become less desirable, and their prices drop. If you think this is set to happen, you’d adopt a ‘short’ position on one of our government bonds futures.
When going short, you elect to ‘sell’ a derivative to open your trade. To close your trade, you’d ‘buy’ the derivative back. You’d earn a profit if you sold for a higher amount than you bought at, and cut a loss if the reverse were true.
However, please note that short selling is a high risk trading method because bond prices can keep rising – theoretically without limit. This means that when taking a short position, you stand to incur unlimited losses. You can attach stops to your positions to protect yourself by capping your loss.
Taking a short position on a government bond can be a way to hedge against possible downturns in the real income earned from shares and bonds you already own.
Inflation is an increase in the aggregate price level as measured by changes to a price index, like the CPI. When inflation is high, the dividends paid by shares and the fixed coupons paid by bonds both lose value in real terms – ie they have lower purchasing power.
This, in turn, negatively affects each asset’s market demand and price. By shorting the bond market and potentially profiting from the decrease in bond prices, you could lessen some of your real income losses.
But, hedging incurs significant risk. This risk is only amplified when trading with leveraged derivatives like CFDs as you stand to lose more than the margin amount you deposited to open a position. Additionally, when short-selling, your losses could be unlimited if the market moves against you and bond prices keep rising.
Interest rate risk is the possibility of rising interest rates causing the value of an investment to fall. Fixed-income assets like bonds are exposed to this type of risk. If you hold bonds or shares in a bond ETF and expect to cut a loss owing to a hike in interest rates, you could hedge by going short on the government bonds futures market.
For example, if you think the Bank of Japan is going to increase interest rates, you could open a position on the bonds futures market by electing to ‘sell’ a derivative like a CFD. If your prediction is correct and bond prices fall, your profit on the trade would mitigate the loss to your other investments.
1 Based on revenue excluding FX (published financial statements, October 2021).
2 As awarded at the ADVFN International Financial Awards 2021.
3 Best Finance App, Best Multi-Platform Provider and Best Platform for the Active Trader as awarded at the ADVFN International Financial Awards 2022.