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What is bonds CFDs trading?

Bonds are debt instruments. IOUs that are used to pay back the principal and interest. The principal is the amount of money borrowed by a borrower, while the interest is the percent paid on top of the principle so that you can have an income from your investment in bonds. Bonds trading is done with forex CFDs therefore it is not the real deal. It is only a bet by investors on whether the bonds will increase or decrease in value.

Today, CFDs are traded on over-the-counter stock exchanges or commodity exchanges across the world. Each exchange has different rules and measures that regulate how to trade with CFDs. The OTC market is estimated to have values of over US$2 trillion. Bonds trading with CFDs is based on the value of the bond in comparison to other instruments. A trader bets that one instrument will increase or decrease while another decreases by either buying bonds and selling them at a higher price or by selling bonds, which are expected to decline in value. On the other hand, if you want to trade with real bonds, you should buy the actual bonds and sell them at a future date.

What are the major world bond CFDs?

The major world bond CFDs are:

US treasury CFDs – these CFDs are based on the US Treasury Bond, which is a government-issued debt security with a maturity of more than 10 years.

Japanese Yen treasury bonds – also referred as JGBs are Japanese government issued bonds that trade in Japan and overseas. The average maturity is 20-25 years.

German Bunds – it is a federal bond issued by the Federal Republic of Germany with maturities of 10, 15 and 30 years.

Swiss Franc bonds - these are economic development bonds that were first issued to help the government finance its budget deficit in 1965. They now make up about a quarter of the Swiss debt.

UK gilts – these are UK government bonds that have maturities of 50 years and an average time to maturity of 16.7 years.

Greek treasury bonds - issued on behalf of Greece by its national bank, with maturities from 7 to 30 years with an average time to maturity of 15.2 years.

Eurozone treasury bonds – it is a bond that has been issued by the European Investment Bank (EIB) and guaranteed under the supplementary guarantee issued by all of the Eurozone member states.

Irish ten-year note - this is an unsecured government debt instrument sold in 7 and 10 years with an average time to maturity of 8.1 years.

Australian government treasury bonds - these are issued by the Government of Australia which has maturities from 6 months to 30 years. It also includes inflation-indexed bonds, treasury index bonds and green bonds (environmentally sustainable).

What moves bond CFDs market prices?

The bond market is affected by the same factors that affect the forex and stock markets. These are:

Interest rate changes – bond prices move up or down in value when there are big shifts in interest rates. Changes in interest rates can be upward or downward depending on how they reflect economic conditions like job growth, inflation and trade balance.

Supply and demand – if there are more sellers than buyers, the price of a bond can drop. This is because supply outweighs demand. If the market reacts to the changes in yield, it means that there weren't enough people who were willing to buy bonds at higher rates or sell them at lower rates had they been able to lock up money at that rate.

Political uncertainty - governments usually act to create a more stable economic environment by participating in the bond market. They do this by offering bonds and buying them back whenever they need to raise or lower the supply of money from the system, which is also done through open market operations. If government actions are unexpected, that can pull down bond prices.

Geopolitical events – major world events like war, terrorism, and elections are all factors that can affect the economy of a country and in turn the decisions of investors to buy or sell bonds. These political forces direct financial markets around the world whether you're looking at an individual government or assessing national debts as a whole.

The inflation rate – bond prices are always sensitive to the inflation rate because it acts as an indicator of how stable or unstable prices will be in the future. If inflation is high, bonds' yields fall and their prices rise accordingly. Inflation has negative effects on the economy so that investors prefer to invest in CDs at higher rates than the rate of inflation.

Risk – if there's more risk in the bond market or investors become too worried about bad economic news, they can demand higher returns to compensate them for the bigger risks that they're taking on with their investment and this sends bond prices lower.

Bond ratings - these are a measure of a bond's credit worthiness. If the rating from a ratings agency matches what the market thinks of the country or company that issued the bonds, it can be indicative of how safe or risky investors think that bond is.

Capital gains – if you buy an investment and its value goes up, then you have made a capital gain which is the profit you've made on that investment. Capital gains taxes are based on the type of asset, your income and tax bracket.

Benefits of bond CFDs trading

Longer-term investment strategy – bonds give you more time to wait for the right conditions to make some money off of your trades. You can hold onto a bond until it reaches maturity if you expect that its value will go up and then sell it for profit or hold onto it as a long-term investment in case the market starts going in your favour.

The taxation rules are quite favourable – income from capital gains and coupon payments are taxed at a lower rate than if you collected the dividends made on shares or if you'd earned interest on a savings account. This is because the government considers them to be more stable investments that might not see huge swings in value over time which could be considered more risky.

Low transaction costs – the commissions that you have to pay on bond trades are generally very low because there's a lot less activity than in other markets which reduces fees and gives you a better chance at making money when bonds prices move up or down in value.

The broad nature of bonds – with bonds, you have access to different types of investment strategies because bond trading is all about fixed-income investments. These include corporate bonds which are an issue that's traded on a corporation's credit rating, municipal bonds which are issued by government agencies and treasury bonds which belong to the national government of a particular country like the USA or the UK.

Low risk – with bond trading, you have a lot less to worry about when it comes to the possibility of losing your money. Because bonds are safer investments that can fluctuate in value in such small increments over time, they're considered as lower-risk than other assets such as stocks or gold.

Risks of bond CFDs trading

Interest rate risk – if there's a rise in the interest rates, then the price of an existing bond will fall because investors will demand a higher return to compensate for the extra risk that they're taking on with their investment.

The threat of default - if you buy a bond and its issuer becomes bankrupt or can't pay back its debts, then you could lose all of your investment and any money that you've made in the meantime because the bond market is so illiquid. This leads to a lot more risk for investors who buy bonds than compared to if they had simply bought shares.

Market risks – since there are so many different types of bonds available, what happens in one part of the bond market might have a knock-on effect on other areas. For example, if there's an expectation that a country is headed into economic trouble and will default on its debts, this can lead to weakness in their government bonds but strength in corporate and municipal bonds as investors try to get their money out of the weakest and into the safest. This can cause some traders to panic and sell off all their positions in bonds, even when they're making money just because they want to get out before everything crashes down.

Now that you have a better understanding of Bond CFDs Trading - consider Global Prime for your next trade.