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Of all the debt-based financial instruments available to traders, government bonds are viewed most
favourably. These tradable options do not confer debt on traders; it's the government which takes on
the debt by borrowing money from the public. The Australian government, like any other government in
the world, needs capital to fund public works programs, reconstruction and development initiatives,
welfare systems, infrastructure projects, and the like.
One of the ways that the Aussie government can raise funds is through the issuance of debt-based financial instruments known as bonds. The government sells these to the public and adds an interest rate on top of the principal to entice you. As an investor, you will know well ahead of time what the prevailing interest rate is. Government bonds are considered one of the safest financial instruments available, although no investment comes with zero risk.
For all intents and purposes, you can consider a government bond a loan to the Australian government, or any other government whose bonds you are thinking of purchasing. Typically, bonds are offered over the long-term. Naturally, the specific country offering the bonds will determine how safe of an investment option it really is. War-torn regions with rampant inflation, collapsing economies and crumbling infrastructures clearly don't present the safety that is needed for these debt-based financial instruments.
By contrast, Australian government bonds are considered rock-solid. They generally make good on their obligation to repay their loans, and this is why so many people choose government bonds as a safe-haven investment with a low yield. The coupon is the interest rate offered on the government bond. If the volatility of alternative financial investments such as cryptocurrency, forex, stocks, commodities, indices, and ETFs, is a little too risky, government bonds might be an option worth considering.
Bonds typically mature over time. This could be, 5, 10, 20, or 30+ years from the current date. The length of time that it takes your bond to mature has a bearing on the interest rate you are likely to receive. The further out the maturity date, the bigger the interest on the principal. Government treasury bonds pay interest on a semi-annual basis. The interest payments are fixed. In the United States for example, all Treasury bonds are exempt from local taxes and state taxes, but bondholders must pay federal taxes on interest received.
Given the global trend of ultra-low interest rates, the US government has started issuing 20-year bonds to bondholders. For governments, there is the added benefit of being able to amass cheap capital now, before interest rates rise. Here in Australia, bonds are considered defensive assets. They are less risky than high-risk growth assets such as shares, even property, and they are considered an ideal diversification asset. Among the many reasons why Australians invest in bonds are lower risks than growth investments, stable income streams (can be higher than term deposits and savings accounts), and the diversification angle.
Australian Government Bonds (AGBs) and corporate bonds are available. Interest is earned on the face value of the bond, and coupon payments are made regularly. There are different types of interest payable on bonds in Australia, including floating rates which rise and fall, fixed rates which don't change, and index rates which guard against inflation. At Xtrade ustralia, you get to trade government bonds with no commissions and fixed spreads, and these include the following popular bonds: U.S. 5, 10 and 30 year Treasury Notes, British Gilt Long Governments, and 10 year Euro Bunds.
The coupon rate is the interest rate that is paid by the government to the holder of the bond. If
you have a semi-annual coupon rate on your bond, that means the full coupon rate will be paid in two
instalments. Assuming that there is a 3% coupon rate, then a US$1000 bond will pay US$30 per in
interest. Viewed differently, the payment will be made in US$15 amounts twice a year. At ultra-low
interest rates like this, it is clear that more money can be made with
But it's not the yield that attracts bondholders; it's the stability offered by government bonds. The yield will never be less than the coupon rate that you offered on the bond. TreasuryDirect.gov makes payments directly into bondholder bank accounts. In the US, bonds go by the name Treasuries. The expiry dates will vary on different types of Treasuries, with T-bills expiring within a year, and T-notes expiring between 1 and 10 years. Of course, there are bonds that can expire in 10 years, or 20 years. In the UK, treasuries are known as Gilts, and there are a unique set of rules governing how they function too.
Bonds, like other instruments, are bought and sold on the financial markets. Of course, there are
many bondholders who would prefer to liquidate their bond holdings and transfer that capital into
more lucrative investment options. When they do so, they sell the bonds at a discount. The Bond
buyer then gets full value for the bond (the full principal) once the bond is redeemed, as well as
the interest. Naturally, it's always a lucrative option to get a discounted bond. The yield on
discounted bonds is always more appealing because you are getting a bond cheaper with fixed
With bond CFDs, Aussie traders speculate on price movements. Recall that we offer the following bond CFDs at Xtrade:
The Gilt Long Government bonds feature a high price, a low price, a spread per unit, premium buy, maintenance margin, and leverage. You will also notice a spread percentage, a premium sell, and an expiry date. These elements feature with all bond CFDs on site.
Like any other CFD, traders can buy and sell bond CFDs. If your analysis of the financial markets
leads you to believe that bond prices will rise, you adopt a bullish perspective. That means you go
long on the bond and click the BUY option. If on the other hand you speculate that the bond market
will sour, you short-sell the bond and click the SELL option. The size of your profit or loss
depends entirely on the accuracy of your assessment. The degree to which the price moves higher or
lower will determine how much you gain or lose in the trade.
In a standard trade, you buy low and you sell high. The difference between the sell price and the buy price is your profit. With bond CFDs, you can also buy low and sell high and generate a return. Of course, CFDs are inherently volatile, and losses can result in unpredictable markets. The benefit of trading bond CFDs is your ability to generate returns in rising and falling markets. If your assessments are correct, this is quite possible. When you sell a bond, you are selling now and buying back later, hopefully at a cheaper price. The difference between the prices is your profit.
It is quite possible that the price of bonds moves contrary to expectations. In that case, you will incur losses. Bond CFD trading is inherently risky, and not suitable for all types of traders. The reason why risk is pronounced with CFD trading is leverage. This amplifies your trading power by a multiple. Consider the following leverage amounts available for CFD trading at Xtrade Australia:
Risk Disclaimer: CFD trading is inherently risky, and not suitable for all types
Risk Disclaimer: It is important to understand that traders are liable for the full value of the trade, not simply the margin requirement.
With CFD trading, you never trade the underlying asset, it’s always the contract for difference. CFD trades linked to spot prices or futures may have expiry dates.
Bond CFDs can magnify your profits and they can also multiply your losses. That's why it’s really important to conduct as much research and analysis as possible before you trade bond CFDs. Markets are unpredictable at the best of times, but blind trading is a recipe for disaster. With bond CFDs traders free up capital for investment in alternative financial instruments. This can serve as a risk mitigation strategy by preventing capital concentration in a limited number of options.
Traditional bonds are issued by governments such as the US government, the British government, or
the Australian government. Naturally, stable governments with strong economies tend to offer more
security to bondholders. Yet, bonds must keep pace with inflationary pressures in order to be
attractive to investors. If inflation rises faster than the interest rate yield on bonds, investors
will lose money over the long-term. Bonds are supposed to be inflation beating investments, if only
marginally. With all government backed bonds, the principal is returned to you at a future point
If you sell a government bond before maturity, you will forfeit interest. There is also the issue of having to front the full value of the government bond from your own capital when that money could be put to better use with alternative financial instruments. For all of these reasons, bond CFD trading makes sense. Over the short-term, bond CFDs can yield gains if the prices move in the expected direction. Since there is no inflation risk to worry about with CFDs, all gains are yours to enjoy. Be advised that losses can also result when trading bond CFDs.
The rule with bonds is as follows: when interest rates are rising, bond prices are low. When interest rates are falling, bond prices are high. It's all about supply and demand. People will not buy bonds if interest rates are rising because bond interest rates are fixed. Therefore, they have to drop the price of bonds to make them more appealing.
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