The Different Types Of Bonds And How To Trade Bonds

Learn How You Can Trade Bonds Successfully

Get into one of the most popular financial assets in the world: bonds.
Learn more about how you can trade in the bond market with PU Prime, the world’s leading CFD provider.

What Are Bonds?

A bond is a financial instrument that allows individuals to lend money to organizations such as governments or corporations. The institution will pay a fixed rate of interest on the investment for the life of the bond and then return the original amount at the end of the loan’s term.

Since bonds are “transferable securities,” they can be bought and sold on the secondary market. This means that investors can make a profit if the value of the asset increases, or reduce their loss if the bond they are selling depreciates. Since a bond is a debt instrument, its price is highly dependent on prevailing interest rates.

Want To Learn How Bonds Work?

Types Of Bonds

Generally, bonds are issued by governments and corporations. With us, you can trade government bonds.

Government Bonds

While any investment carries risk, sovereign bonds from stable economies are considered among the least risky investments available – to the point where they are generally considered risk-free for investment purposes. In the UK, bonds issued by the government are called Gilts. In the United States, they are called Treasuries.

Find Out More About Government Bonds

Corporate Bonds

Although high-quality bonds issued by reputable companies are considered a conservative investment, they still carry more risk than government bonds and therefore pay higher interest rates. The credit risk of corporate bonds is assessed by rating agencies such as Standard & Poor’s, Moody’s and Fitch Ratings.

Learn More About Bond Trading

Bond trading is a way to profit from fluctuations in the value of corporate or government bonds. Many consider it an essential part of a diversified trading portfolio, alongside stocks and cash.

With us, you will trade on changes in bond prices using CFDs – a type of leveraged derivative. This means that when you trade, you will never own the actual bond. Instead, you would take either a short or long position in the bond futures market. Your profit or loss will depend on whether you correctly predicted the direction of the move, how the market will move and the size of your position.

With bond futures CFDs, you can speculate in sovereign bonds with up to 100 times leverage when trading with PU Prime. However, do note that leverage, while amplifying potential profits, will also incur a proportionate increase in risk – and proper risk management is essential. 

Choose Your Bond Trading Strategy

Hedging

When done properly, hedging can be seen as a way to minimize your losses if the market turns against the investment you have made. It is achieved by placing trades strategically so that the profit or loss in one position is offset by changes in the value of the other.

Any strategy used when hedging is defensive in nature, meaning it is designed to minimize losses rather than maximize profits. But hedging should be approached with caution. To hedge an existing bond market position, you can use CFDs to short the bond futures market. It is important to note that derivatives such as CFDs are leveraged, which means you can lose more than the margin you deposited to open a position – your CFD hedge should be proportionate to the actual position you have in the bonds market.

Speculating On Changes In Interest Rates

ecause of the inverse relationship between bond prices and interest rates — that is, when interest rates rise, bond prices fall, and vice versa — bonds allow you to speculate on interest rate movements. With us, you can do this by taking a position in the government bond futures market using CFDs.

For example, if you think interest rates are going to rise, you can go short by selling in the market. Conversely, if you think interest rates will fall, you can take on a long position. 

A popular strategy to consider when trading government bond futures is the Five Against Bond Spread (FAB), which profits from interest rate and yield movements. This works on the assumption that the yield curve for Treasuries will eventually normalise from any mispricings (i.e in the case of an inverted curve) that will be reflected in futures prices.

The FAB involves going long on a 5-year T-note and shorting on long-term (15 to 30-year) bonds; or going short on a 5-year T-note and going long on long-term (15 to 30-year) bonds. 

Here, you would take two opposing positions in bonds of different maturities to take advantage of a bond that is under- or over-valued. 

Because the FAB seeks to profit from yield spreads, this is a longer-term strategy as interest rates shift more slowly than, say, stocks. 

Get Started With Bonds Trading