Best bonds to watch for traders
In uncertain times, investing in bonds can offer stability and returns that equities struggle to match. Find out everything you need to know about adding bonds to your portfolio – including the best ones to watch – here.
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 trade, 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: trading
One can 'buy' bonds by trading on their price movements.
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 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
- Open a live IG account, either online or via our app
- Choose to trade using CFDs
- 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 trade bonds via CFDs
- Open your IG account to get started
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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