An Introduction to Spread Betting on Treasuries
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Treasuries Spread Betting

Treasuries Spread Betting

Treasuries spread betting markets can be used to take a view on where a country's interest rate is headed next, or to measure the market's confidence in a government's ability to service its own debts.

As a result, and as the global economic crisis rolls on, treasuries are attracting unprecedented levels of interest from spread bettors.

Put at a basic level a bond is an IOU.

You effectively lend money to a company or government in return for a fixed level of income (coupon) and the guaranteed return of your investment at the end of the bond's life (known as 'the maturity date'). You then receive a certificate that you can sell on in the secondary market.

Many individual government bonds have abbreviated names eg UK government bonds are called Gilts (so called because the original bonds were gilt edged), US government bonds are T-Bonds, German government bonds are Bunds and Japanese government bonds are JGBs.

Note that when you spread bet on bonds you do not own the bonds or get a certificate, you are purely speculating on the value of the underling market e.g. US 10 year T-Bonds.

Why Spread Bet on Treasuries?

According to Tim Hughes, Managing Director, IG, "With macroeconomic news now making the headlines on a daily basis, a number of IG clients are seeing treasuries as an increasingly useful way of getting exposure to markets that historically may not have seen the same degree of volatility as currencies or indices.

“Significant themes like the future of the euro and managing the US deficit are going to linger for some time yet. We see these spreads cut as a way to introduce even more investors to this important asset class."

Spread betting offers investors a number of benefits when trading treasuries, including a transparent pricing structure and the ability to make tax-free* profits.

Also, because spread betting is a leveraged product, only a percentage of the total exposure is required initially as a deposit.

Essentially, the leverage multiplies both your profits and your losses.

So remember, as with all forms of spread betting carry a high level of risk to your capital and you may lose more than your initial investment. Only speculate with money that you can afford to lose.

How to Spread Bet on Treasuries: Short Sterling Example

You decide to look up the UK interest rate market, this is known as “short sterling” (not to be confused with “shorting”).

A spreads company quotes you the ‘March’ futures market at 95.40 - 95.64.

The quote implies that by the third Wednesday of the current quarter, i.e. when this March futures market expires, UK interest rates will be between 4.36% and 4.60%.

This is calculated by taking 100 basis points and subtracting estimated interest rates at the time of expiry, ie 100 - 95.40 = 4.6, and 100 - 95.44 = 4.36

You think that interest rates will rise so you sell the Sterling Future at 95.40 for £5 per tick (for this market 1 tick = 0.01).

As it happens the interest rates fall and therefore the short sterling spread rises. The Spread quote moves to 95.76 - 95.84. You decide to cut your losses.

Therefore you close your bet. To close a bet you place the same bet in the opposite direction. ie you Buy £5 per tick at 95.84 and multiply by the stake.

Your profit / loss is calculated by calculating the difference between the closing level (95.84) and the opening price (95.40).

Loss = (95.40 - 95.84) x £5 per tick

= -0.44 x £5 per tick = -£220 loss

However let's say you were right and the market did fall and the trade was settled at 95.10.

Again your profit / loss is calculated by calculating the difference between the closing level (95.10) and the opening price (95.40).

Profit = (95.40 - 95.10) x £5 per tick

= 0.30 x £5 per tick = £150 profit

Short Sterling market quoted as of November 2006.

Treasuries Markets

Each company will have their own specific treasuries markets however many of the companies will offer most, if not all, of the following:

Interest Rate Futures Markets

  • Euribor
  • Euro dollar (Eurodollar)
  • Short sterling
  • Euroswiss
Also see companies that offer interest rate markets.

Bonds Futures Markets

  • Bund
  • Bobl (Eurobobl)
  • Schatz (Euroschatz)
  • UK Gilt
  • US T Bond 10 year
  • US T Bond 30 year
A number of companies also offer:
  • Italian Bonds (BTP)
  • Japanese 10 Year Bond (JGB)
  • US T Bond 5 year
Also see companies that offer bonds markets.

US 2yr Bonds Commitments of Traders Report - 15 May 2018 (i)

Futures Only Positions, CBT , Code 42601, (Contracts of $200,000 face value) (i)

Reporting Firms (i) Non-Reportable Positions (i)
Non-Commercial (i)
Commercial (i) Total Reportable (i)
Commitments (i) Open (i) Interest Commitments
Long (i) Short (i) Spreads (i) Long Short Long Short Long Short
456,847 487,876 168,558 1,470,148 1,390,916 2,095,553 2,047,350 2,230,275 134,722 182,925
Changes from 8 May 2018 (i) Change in (i) Open Interest Changes from
Long Short Spreads Long Short Long Short Long Short
25,270 2,043 46,670 69,515 93,372 141,455 142,085 142,851 1,396 766
Percent of Open Interest for Each Category of Trader (i)
Long Short Spreads Long Short Long Short   Long Short
20.5% 21.9% 7.6% 65.9% 62.4% 94.0% 91.8%   6.0% 8.2%
Number of Traders in Each Category (i) Total (i) Traders  
Long Short Spreads Long Short Long Short    
58 82 34 146 146 225 241 345    
Long/Short Commitments Ratios (i)   Long/Short Ratio
Ratio   Ratio Ratio   Ratio
1:1.1   1.1:1 1:1   1:1.4
Net Commitment Change (i)  

Also see:

Spread Betting on Italian Bonds

Italian bonds are known as Buoni del Tesoro Poliennali (BTP).

According to IG's Chief Market Strategist, David Jones, "Historically, bond yields across all of the Eurozone sovereign debt instruments were similar. German bonds were seen as the benchmark.

"Nevertheless, during 2011, there's been a decoupling of this relationship. As a result the heavily traded BUND and BOBL are no longer a reasonable proxy for other Eurozone-based sovereign bonds.

"The upshot is that there's been a large increase in the volumes traded in the underlying market for instruments like Italy's BTPs.

"With this liquid underlying market, combined with the current levels of volatility and a steady flow of news that has the ability to move the bond markets, there's the potential for BTPs to be rather popular.

"In the past, fixed income markets have been felt to be too slow moving to be of much interest to most spread bettors.

"However, ratings agencies, central bankers and politicians now all have the potential to shift the various Eurozone bond markets. There's also the threat of a sovereign default.

"With all these influences creating increasing levels of volatility, the popularity of instruments such as bonds issued by Italy will continue to increase."

IG is offering Long-Term Euro-BTP (BTP) futures contracts. Settlement prices will be as determined by Eurex.

Bonds Trading Guide

The most popular bonds trading questions:

Interest Rates Trading Guides

The most popular interest rate trading questions:

Italian Bond Yields Decline Despite Election Uncertainty

Below, an interesting way of analysing the bond markets by Michael Hewson, CMC Markets, 11 Jan 2013.

Despite the uncertainty surrounding the upcoming Italian elections, yields on Italian bond markets have continued to fall as financial spread betting investors become more relaxed about the risks of a potential euro break-up.

Ever since ECB President Draghi uttered those now immortal words “and believe me it will be enough” last July, pressure has eased on borrowing costs across the board. As a result, we have seen spreads between Italian and German 10 year bonds narrowing to their lowest levels since August 2011.

Spread Betting The slow decline in yields over the past few months has been pretty much one way, apart from a brief spike in early December.

This comes despite the initial uncertainty caused by Italian technocrat, PM Mario Monti’s decision to step down early as a result of the loss of support for his on-going reform program.

The return of former PM Silvio Berlusconi to the political stage appears to be being treated as “white noise” by the markets for the moment.

In addition, the market is remaining calm as the current poll leader Pier Luigi Bersani has stated that he intends to stick by the current reform program, if he is elected.

The decision by Mario Monti to run as a centrist candidate has also introduced a new element into the process. The understanding is that his presence could actually split the vote in a way that could actually see Berlusconi hold the balance of power.

All the noise so far has been about Berlusconi and Monti as they fire off verbal grenades at each other, while poll leader Bersani has looked on from the side-lines.

Italian 10-Year Bond Yield Chart Italian 10 Year Bond Yield Chart

Berlusconi’s pledge to try and create a blocking caucus in the Senate appears, for now, to be being treated as a low probability by bond spread betting markets. However, there remains the very real risk that post-election the current fall in yields could see a sharp reversal.

The state of the Italian economy is certainly not helping the pro-European cause with Italian unemployment continuing to rise and youth unemployment at 37.1%, a record high. GDP continues to contract and consumer sentiment remains subdued.

For now the “Draghi Put” is keeping investors and markets on-side, as can be seen by the narrowing of the BTP/Bund spread shown below to its narrowest levels since mid-2011.

BTP/Bund Chart BTP/Bund Chart

The direction of travel with respect to borrowing costs for Italy remains firmly down and the spread looks like it could well come in further after breaking below the levels seen in the second quarter of 2012.

It is important to remember that the lows seen early last year were as a result of the second LTRO, and that subsequently didn’t turn out so well.

As things stand, the ECB’s OMT pledge has not yet been tested, however, that could well change if unemployment continues to rise and the Italian election returns an inconclusive result.

Markets are currently assuming a positive result from the forthcoming polls which, on the face of it, appears somewhat optimistic. Any outcome other than a clear Bersani win is likely to see further reforms very difficult to implement and see pressure on Italian yields return.

For now the spread betting markets appear to be pricing in a positive outcome, with spreads at 260 points. The current move lower could see spreads come in to 200 points, the 2010 highs, but that could change as polling day approaches.

Financial Spread Betting The flip side of falling bond yields in Italy and Spain has been the correlation these yields have had with the performance of the euro currency.

When yields have risen the euro has fallen, however the recent weakness in these yields has seen a strong rebound in the value of the single currency.

Given the economic dynamics at play in Italy and Spain, a stronger currency is the last thing these two countries need.

In a sense, the normalisation in financial markets could have the unintended consequence of making it much harder for Italy and Spain to regain competitiveness, and trigger off more unrest in these countries, over the coming months.

The peaks above 7% seen in Italian and Spanish yields last year also coincided with the $1.2050 lows in EUR/USD. Since those euro lows, yields have dropped sharply.

Trading Risk Warning
'Treasuries Spread Betting' edited by Jenna Cutly, updated 20-May-18

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