Interest Rates and Bonds

Trading in Interest Rates is similar to trading in the other financial products. Quite simply your are either ‘buying’ or ‘selling’ a quote.

There are two distinct types of interest rate products and it is therefore important to understand the differences between them before trading the various instruments that spread betting providers offer.

Short Term Interest Rates

Short term interest rate bets offer the holder the ability to gain exposure to a range of markets such as Short Sterling (UK rates), Euro Dollar (US rates) and Euribor (European rates). The quotation of the contract is 100 minus the implied 3 or 6 month interest rate of the relevant country or region. For example, June Short Sterling has a price of 94.25 which implies a rate of 5.75% over a 3 month period. Therefore, if you believe that short term interest rates will fall, you would ‘buy’ the contract; conversely, if you believe short term interest rates will rise, you would ‘sell’ the contract.

Long Term Interest Rates

Bond products allow you to trade on the price of long term interest rates in various countries. As with short term interest rates, when you expect rates to fall you would ‘buy’ and when you believe rates will rise, you would ‘sell’.

The most commonly traded products are the 10year German Treasury Bond (also known as the ‘Bund’). In addition we offer spread bets on the UK Government 10-year Gilt, 5 Year BOBL and 2 Year Schatz.

Example of an Interest Rate trade:

There have been hawkish comments from the Bank of England (BOE) and you believe it may be about to raise interest rates.

The provider is quoting the Short Sterling June contract:

Short Sterling SELL 9444 – 9448 BUY

You choose to ‘Sell’ £20 per point at 9444.

Your instincts are proved correct and interest rates increased from 5.5% to 5.75%. You decide to realise the profit you have made.

The provider is quoting the Short Sterling June contract at:

Short Sterling SELL 9421 – 9425 BUY

You ‘Buy’ £20 per point at 9425 to close your position. Profit is calculated as:

Opening Level 9444
Closing Level 9425
Difference 19 points

Your profit: 19 x £20 = £380.00

Conclusion

Having seen the various types of markets you can trade, this should give you an idea of the variety that is available to today’s traders and investors.

Basically the global markets are easily accessible and available at your fingertips with today’s enhanced computer technology and with the speed of the internet. There has never been a better time for traders to embark on a journey to trade the markets at highly reduced costs and increased efficiency.