How to invest in bonds
Bonds are essentially a lending agreement between a buyer and seller that are issued by either the government or a private corporation. Their duration can be short-term, medium-term or long-term depending on the individual bond or treasury. They are seen as a relatively stable and low-risk investment, often traded in uncertain times.
In the UK, you can trade a wide range of government bonds, otherwise known as gilts, and also corporate bonds. These can be of a fixed-term with a maturity date and they are authorised and regulated by the Federal Financial Supervisory Authority (BaFin). Bond trading is available globally and the treasuries market is open 24 hours a day, from Sunday night to Friday evening, due to overlapping hours for each country and stock exchange. These trading hours are outlined below in more detail for our list of most popular bonds. We currently offer more than 30 government bond and interest rate instruments on our online trading platform.
In this article, we compare investment bonds to find an investment or trading opportunity that is most suitable for you. We have created a list with 10 of the most popular bonds to invest in right now.
Are bonds a good investment?
Bond trading can be used as a partial hedging strategy for when other equities, such as shares in the stock market, are experiencing a period of market volatility. If you encounter losses on other assets, then these may be partially offset by any profits that you make through bond investments. The overall stability of your trading portfolio will also increase by adding similar and reliable securities. Movements within other markets (for example, the stock market) can sometimes affect bond prices, and in particular, bonds are sensitive to changes in interest rates. Although this can increase the chance of risk, investors can also use bonds to hedge against interest rate movements. When interest rates are low, bond prices increase and there is more purpose for trading bonds.
High-yield bonds, also known as junk bonds, are effective for diversifying your investment portfolio. This is because these bonds represent countries and companies with a lower than average credit rating, who pay higher yields to investors in order to compensate for the risk of possible higher interest rates. Traders who tend to prefer a riskier investing strategy may wish to explore high-yield bonds over government bonds, even though government bonds are better rated and represent safer and more secure investments.
Trading vs investing in bonds
Trading and investing in bonds follow two separate processes. We offer spread betting and CFD trading on the treasuries market, where traders do not own the underlying asset but instead trade on speculative price movements. Traders are not required to pay tax on spread bets or stamp duty for CFDs, however tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK. Similar to other assets, traders often choose to go long if they expect the price to rise, or go short if they expect the price to fall. Buying and holding a short position can help to offset any losses that traders have encountered elsewhere in the financial markets.
A particular appeal of spread bets and CFDs is the use of leverage. Traders are only required to place a small deposit and trade on margin, which will grant them better exposure to the market. Our margin rates for treasury bonds start at just 3.3% and for interest rates, they start at 20%.
Another way to take advantage of popular bonds is to invest in exchange-traded funds (ETFs). These are investment funds that hold a collection of underlying assets. Corporations that hold ETFs can issue a portion of ownership of the fund to investors, which in turn gives them more exposure to the underlying assets. Bond ETFs are an easier method than outright buying and holding the security from an issuer. Instead, you speculate on the price of the underlying bond ETF through spread betting or CFD trading account, in a similar manner to share trading. Leveraged ETFs are complex financial instruments that carry significant risks. Certain leveraged ETFs are only considered appropriate for experienced traders.
Popular bonds to watch
1. iShares Core UK Gilts UCITS ETF
This fund’s aim is to track the performance of an index made out of GBP denominated UK government bonds. It has a fixed interest rate and helps investors to have a diversified exposure to UK gilts, as it provides single country exposure only.
Margin rate: starting at 20%
Trading hours: Monday – Friday, 08.00-16.30
2. Vanguard Total Bond Market ETF
The aim of this fund is to track the performance of a broad, market-weighted bond index in the US dollar-denominated market. This is an intermediate-term bond and offers a relatively high potential for investment income. It is a passive investment and a reliable bond for hedging risks within your stock portfolio.
Margin rate: starting at 20%
Trading hours: Monday – Friday, 14.30-21.00
3. Euro Bund
This treasury is based on the underlying price of the Euro Bund issued by the German federal government. It is one of our most popular treasury-based products. In most cases, these long-term bonds have a maturity of between 10 and 30 years.
Margin rate: 3.34%
Trading hours: Monday – Friday, 01.15-21.00
4. iShares iBoxx $ High Yield Corporate Bond ETF
This is one of the most commonly used ETFs for high-yield bonds. It seeks to track the investment results of an index composed of US dollar-denominated high-yield corporate bonds. Investors often use it for a higher income.
Margin rate: starting at 20%
Trading hours: Monday – Friday, 14.30-21.00
5. US T-Bond
The US Treasury Bond is based on the relative value of the fixed-interest, US government debt security. It often increases in value in times of economic or political instability as investors seek a safe haven to keep their money safe.
Margin rate: 3.34%
Trading hours: Monday – Thursday, 00.00-00.00, Friday 00.00-22.00, Sunday 23.00-00.00
6. Vanguard Intermediate-Term Corporate Bond ETF
This fund invests in high-quality and investment grade corporate bonds, therefore excluding any high-yield bonds. It is an intermediate-term bond with an average maturity between 5 and 10 years. There is a moderate interest rate risk and it provides a stable level of income.
Margin rate: starting at 20%
Trading hours: Monday – Friday, 14.30-21.00
7. SPDR Barclays High Yield Bond ETF
This is a fixed-income bond that aims to provide investment results that correspond to the price and yield performance of the Bloomberg Barclays High Yield Very Liquid Index. Investors are provided exposure to US dollar-denominated high-yield corporate bonds with above average liquidity. This index is a more cost-efficient method than accessing bonds individually.
Margin rate: starting at 20%
Trading hours: Monday – Friday, 14.30-21.00
8. UK Gilts
The UK Gilt treasury is based on the underlying bond security issued by the UK government. The government has never failed to make interest or principal payments on gilts when they are due, therefore this is one of the safest investments a trader can make. The treasury is made up of both conventional gilts and index-linked gilts.
Margin rate: 3.34%
Trading hours: Monday – Friday, 08.00-18.00
9. Vanguard S&P 500 UCITS ETF
This fund tracks the performance of the Standard and Poor’s 500 Index, which is a capitalisation-weighted index of 500 large US stocks. Its top holdings include blue-chip companies such as Microsoft, Apple and Amazon. The fund can provide a moderate and stable income.
Margin rate: starting at 20%
Trading hours: Monday – Friday, 08.00-16.30
10. Euro Bobl
The Bobl treasury is Germany’s version of UK gilts and is based on the underlying value of a collection of medium-term German federal government issued bonds. Its underlying assets have a maturity of between 4 and 6 years. Bobl futures are some of the most popular bonds and fixed-income securities in the world.
Margin rate: 3.34%
Trading hours: Monday – Friday, 00.15-21.00
How to trade on bonds with CMC Markets
You can speculate on the price movement of bonds on our online trading platform, Next Generation. All you need to do is open a live account and decide whether to start spread betting or trading CFDs in exchange-traded funds. Please note that there is no capital gains tax on profits from rates and bonds spread bets and no stamp duty to pay when trading CFDs*.
Alternatively, you can practise first with virtual funds on our demo trading account.
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*Tax treatment depends on your individual circumstances. Tax law can change or may differ in a jurisdiction other than the UK.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.