Best bonds to watch for investors and traders

• What you need to know about bonds
• Why buy bonds?
• Trading vs investing in bonds
• Best bonds to watch as an investor
• Best bonds to watch as a trader

Background to bonds

Bonds are essentially IOUs, issued by a country or company to raise capital. When you buy one, you’re loaning the issuer your money for a set period. In return, they pay regular payments to you (the coupon) then give you back your original investment once the bond matures.

Bonds come in two broad categories:

• Government bonds are issued by countries. These tend to be seen as very safe, especially when attached to a large economy such as Germany or the US
• Corporate bonds are issued by companies. These are usually riskier than government bonds – the level of risk depends on the issuer

Like any investment, lower risk comes with a lower potential return.

Why buy bonds?

There are lots of different reasons why an investor or trader might buy bonds. You may, for instance, use corporate bonds as a lower-risk investment opportunity than equities. This is because, if a company defaults, bondholders get their capital back before equity investors do.

However, two reasons to buy bonds stand out: diversification and interest rates.

Diversification

Government bonds are seen as one of the safest investments available, as countries rarely default on their debts – although this can happen. For this reason, many investors use them to diversify their portfolio.

When recessions or bear markets arise, individuals will often flee equities for ‘safe-haven’ assets, including bonds. This causes their prices to rise. If your portfolio already holds bonds in this eventuality, then any equity losses you see may be partially offset by profits from your safer holdings. Plus, the relative stability of bond prices reduces overall volatility in a portfolio.

Interest rates

Other than shares, bond prices aren’t particularly affected by other markets. A spike in gold or oil, for instance, shouldn’t make much difference to a bond portfolio. However, there is one variable that will move bond prices significantly: interest rates.

When interest rates are high, there's less reason to invest in bonds, so their prices go down. When rates are low, the opposite is true. While this means bonds are subject to interest rate risk, it also makes them useful for traders who want to hedge against interest rate movements.

Learn more about the relationship between bonds and interest rates.

Buying bonds: investing vs trading

There are two main ways to buy bonds: invest in them directly, or trade on their price movements. Let’s take a closer look at both.

Investing in bonds

When you invest in bonds, you’re buying them outright and adding them to your portfolio. Doing this with the issuers themselves can be a tricky process, with minimum lots of £100,000 in most cases. So many individual investors will invest via a fund, such as a bond exchange traded fund (ETF), instead.

Bond ETFs are funds that only hold bond assets. They pay a regular dividend – in a similar way to a bond’s coupon – and move up or down in value as their underlying holdings move in price. But because ETFs trade on exchanges, they are much easier to buy and sell. So you get lots of the benefits of bonds, plus added liquidity and transparency.

There's a wide number to choose from, ranging from groups of high-yield corporate bonds to individual UK gilts.

There is one key difference between bonds and bond ETFs to be aware of, however. While the former will mature and pay you your money back, ETF investments last indefinitely.

Open an IG account to start investing in bond ETFs.

Trading bonds

When you trade bonds, you’re using derivatives such as CFDs to speculate on their price movements without taking ownership of any underlying assets.

This brings two main benefits over investing. Firstly, you can go long if you think bond prices are likely to rise, and short if you think they’ll fall. Say you believe that an upcoming interest rate hike from the Bank of England (BoE) is set to hurt gilts. You could open a short position on long-term gilts and profit if their price drops.

This makes trading particularly useful for hedging. If you have holdings in your portfolio that might suffer from rising interest rates, you can short bonds to offset the risk.

The second benefit is margin. To trade bonds, you only have to put up a fraction of the cost of your position upfront. To short £5000 worth of long-term gilts, for example, you only have to put down £1000 as initial margin.

Start trading bonds, equities, indices and more with a live IG account.

What are the best bonds to watch for investors?

1. iShares Core U.S. Aggregate Bond ETF (AGG)
2. Vanguard Total Bond Market Index Fund (BND)
3. iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
4. Vanguard Intermediate-Term Corporate Bond Index Fund (VCT)
5. iShares Core Corp Bond UCITS ETF (IEAH)

These five bond ETFs are all available via our share trading service, and were chosen because of the high value of their holdings. To find your own funds, head over to our ETF screener.

iShares Core U.S. Aggregate Bond ETF (AGG)

All ETFs seek to track the movement of an underlying index. For iShares' Aggregate U.S Bond ETF, that index is the Bloomberg Barclays U.S Aggregate Bond index, which measures the performance of all US investment-grade bonds. That means it ignores any rated BB or lower.

Almost half of AGG's $76-billion holdings are government securities, and over 75% are AAA rated.

Vanguard Total Bond Market Index Fund (BND)

The Vanguard Total Bond Market fund tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. Its top holdings are Federal National Mortgage Association bonds, T-notes and treasury bonds.

Like AGG, BND only holds assets rated AAA-BBB. It does invest internationally, but only if the bonds are dollar-denominated.

iShares iBoxx $ Investment Grade Corporate Bond ETF

The iShares iBoxx $ Investment Grade Corporate Bond ETF does what it says on the tin: invests in BBB+ dollar-denominated corporate bonds.

Companies LQD invests in include GE, Anheuser-Busch, CVS and Goldman Sachs. Its ten biggest holdings make up just 2.5% of its $40 billion net assets.

Vanguard Intermediate-Term Corporate Bond Index Fund (VCIT)

This bond offers exposure to corporate bonds with medium-term maturities – that is, between five and ten years. It focuses on industrial, utility and financial companies, with some of its biggest holdings comprising of CVS Health, AbbVie, Verizon and Wells Fargo.

All of VCIT's assets are investment grade, with 56% rated BBB and 37% A.

iShares Core Corp Bond UCITS ETF (IEAH)

The iShares Core Corp tracks the Bloomberg Barclays Euro Corporate Bond Index, with holdings including Rabobank, Orange, Anheuser-Busch, Volkswagen and Total. Unlike the US bonds on this list, it's UCITS-approved and its currency is GBP – meaning UK investors can buy it without paying a currency conversion fee.

What are the best bonds to watch for traders?

As well as trading on the prices of ETFs, you can use CFDs to speculate on individual government bond markets. Here's an introduction to what you can trade with IG.

Germany: the Bobl, Bund, Schatz and Buxl

Germany’s bonds are some of the most traded and watched in the world. The Bund is its long-term offering, the Bobl is medium term and the Schatz is short term. The Buxl, meanwhile, is its ultra-long-term bond.

US: treasury bonds and T-notes

US bonds with maturities over ten years are called treasury bonds (T-bond), while Treasury notes (T-notes) have maturities of ten years or less. With IG, you can trade T-bonds plus 10-, 5- and 2- year T-notes.

UK: gilts

The BoE, meanwhile, calls its short- and long-term bonds gilts – because the original certificates had gilded edges.

Italy and France: BTS, BTP and OAT

Italian bonds are known as BTPs. France calls its bonds Obligations assimilables du Trésor, or OATs.

How to buy bonds

1. Open a live IG account, either online or via our app
2. Choose whether you’d like to invest by share tradng or trade using CFDs
3. Pick a bond and open your position

If you’d like to try out trading without committing any capital, open an IG demo. You’ll get £10,000 in virtual funds to trade bonds, equities, indices and more.

Buying bonds summed up

• When you buy a bond, you’re lending the issuer your money. In return they pay you a coupon and return your capital when the bond matures
• With IG, you can invest in bond ETFs and trade bonds via CFDs
• Open your IG account to get started