Spread bet on government bonds
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Spreadbetting on bonds: an introduction
Although government bonds have long been the domain of professionals, they are becoming increasing popular among retail investors. However, there is nothing special about these securities that should make them the preserve of City professionals. This article aims to demystify this asset class and provide you with the essential info to get involved in the lucrative debt markets.
When governments need to borrow money say to build new roads or
whatever, they issue debt securities which are sold to investors. In order to ensure that investors are adequately incentivised to provide the required funds, the government would pay an attractive level of interest.
How does spread betting on bonds work?
Typically, brokers will either let you bet on the price or yield of the security. You can usually spread bet on a variety of markets including the UK, US and other developed markets depending on the broker.
Practical government bond spread betting example:
Buying the Sep 06 UK Gilt
An interest rate decision by the MPC is due shortly and your view is that the price of the UK Government Gilt will rise over the next couple of weeks. The current quote is 10494 – 10498, so you decide to buy £10 per point at 10498.
Just as you expected, two weeks later, the price has gone up and the quote is 10633 –10637. You decide to close at 10633.
Your profit on the spread bet is [10633 – 10498] x £10 = [135 x 10 = £1350]
What moves prices in debt markets?
Prices fluctuate with changes in interest rates. This means that factors that affect underlying interest rates are important in determining prices at any point in time. Consequently, economic news flow on items such as GDP outlook, consumer price levels and even the comments of the members of the Bank of England’s Monetary Policy Committee or the members of the FED in the US are factors that may drive price activity in these markets.
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