How to invest in bonds in the UK

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.

One 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.

Some of the most popular bond ETFs are available on our online trading platform, from UK gilts to junk bonds. Find out more about ETF trading and how it compares with our other products.

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. When spread betting bonds, traders are not required to pay tax or stamp duty, 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 betting bonds, which is our most popular derivative product, 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%.

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.