Bond trading involves buying and selling bonds, which are debt securities that are typically issued by governments, treasuries or corporations. This shouldn’t be confused with investing in bonds, which involves a different approach.
While investing in bonds means buying them and holding onto them until maturity, trading means aiming for a shorter-term profit. We’ll be looking at how to trade bonds online and which types of bonds are best suited to short and medium-term strategies.
What Does It Mean to Trade Bonds?
When you trade bonds online, you’re looking to benefit from short-term price movements. This contrasts with the investment approach, where you hold onto them until maturity, or at least for a longer period.
Investing in bonds is often carried out to attempt to earn steady returns over a period of several years. However, when you learn how to trade bonds online, you’ll be looking at a shorter time frame of days, weeks or months. In this way, you take a more active approach, looking to buy and sell according to anticipated price movements. So, you need to be more aware of the factors that can affect prices in the near future.
How to Trade Bonds Online Effectively
To learn how to trade bonds effectively, there are several key areas to be aware of. Going through the following steps will help you see what to take into account before you start trading.
- Look at the main market drivers. The bond market moves mainly due to factors such as interest rate expectations. This means an understanding of economic indicators, including inflation data and expected changes to central bank policies, is crucial. Being able to anticipate rate changes and act accordingly will help you trade bonds online effectively.
- Analysing yields. Interest rates, time to maturity and credit risk are among the factors that determine the yield of a bond. For example, if interest rates rise, then newly issued bonds with a better rate will be more attractive than existing bonds at a lower rate. The yield curve lets you view the yield offered by bonds with differing maturity dates at any given time.
- Consider fundamental analysis and technical analysis. These are different ways of analysing the bond market before deciding what moves to make.
- Choose the right platform. Finding where to trade bonds is the next important step. You need to be able to move quickly and make the trades without any fuss on a trusted platform.
Types of Bonds You Can Trade
The different ways of trading bonds can be carried out with the following types of bonds that are commonly traded in this market.
Government bonds are generally more stable and secure than other types, although this varies according to the reputation and stability of the issuing country. If you invest in government bonds, the yield is based on the country’s credit rating. Those nations with a poorer credit rating typically need to offer higher yields to attract investors. The liquidity varies according to the issuing country, too.
Corporate bonds tend to offer the highest yields, since the risk of the company defaulting is also taken into account. You can compare corporate bonds and government bonds with the same maturity by looking at the credit spread, which tells you the difference in yield between them. When you invest in corporate bonds, you need to be aware that this is considered the least liquid bond market.
Treasury bonds have the lowest risk level and also the lowest yield. Those traders who buy and sell treasury bonds generally do so because of expected interest rate changes, instead of basing their trades solely on the yield. If you want to trade treasury bonds, the US Treasuries are the most liquid in the bond market.
Best Bonds to Invest In vs Trade Bonds
When you invest in bonds, this is a long-term strategy. Because of this, the majority of investors look for a steady rate of income generation while preserving the invested capital. Investors will usually look for higher-quality bonds such as those issued by governments and treasuries.
When you trade bonds, you’re looking to benefit from price movement in the market. High-yield junk bonds are more volatile, making them more suitable for higher-risk trading strategies. Short-term bonds tend to move less abruptly based on interest rate changes, making them suitable for a more conservative approach to managing risk.
Platforms and Markets Where You Can Trade Bonds
The ActivTrader, MT5 and TradingView platforms can all be used when you get started on our bonds page. Each of these platforms offers a different way of trading, with analysis tools and a variety of useful tools for you to use.
Can you trade bonds in different markets? Yes, the likes of US Treasury bonds, Euro Bund and Euro BTP are among the options we offer. You can access a huge selection of bond types from across the planet on any of our platforms.
Common Risks and Considerations When Trading Bonds
There are some potential risks for you to be aware of when you start to trade bonds online.
- Interest rate risk is the biggest issue to be aware of. Any changes to interest rates affect the value of bonds on the market, meaning that traders need to understand the possibilities of interest rate changes that could lead to price swings.
- Credit or default risk covers the risk that the issuer is unable to pay interest or the principal amount to bondholders. This risk is higher on high-yield junk bonds or those issued by companies and corporations with a lower credit rating.
- Liquidity risk concerns the possibility of being unable to sell the bond when you want for a reasonable price. The most liquid bonds, such as those issued by major treasures, shouldn’t encounter this issue. However, traders who want to sell quickly may find this to be a problem with the likes of corporate and municipal bonds.
How to Trade Bonds Online FAQs
What Types of Bonds Should I Choose for Trading?
The bonds you choose for trading will depend on your style and risk tolerance. Take into account the differences in liquidity, yield and risk between government, corporate and treasury bonds to make an informed decision.
Are Corporate Bonds Suitable for Trading?
Yes, you can choose to trade virtually any type of bond online, including those issued by corporations. However, bear in mind that corporate bonds often have the highest risk due to factors such as the relative lack of liquidity.
Are Bonds Better for Trading or Investing Purposes?
Bonds are suitable for both trading and investing purposes. The method you use depends on whether you want the short-term, more active approach of trading or if you prefer the longer-term approach of waiting for the bonds to reach maturity.
Is Learning How to Trade Bonds Easy?
A large part of the learning process comes from finding out how to analyse the market and what factors to take into account. Once you’ve decided to do this, the different trading platforms offered by ActivTrades make it easy to analyse the charts and carry out the trades you decide to enter.
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.
All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk. Forecasts are not guarantees. Rates may change. Political risk is unpredictable. Central bank actions may vary. Platforms’ tools do not guarantee success.