Forex Brokers Offering Bond Trading

The days of forex brokers offering currency pairs as an exclusive product to their clients are gone. With the ever-increasing demand for traders to have an all-in-one trading venue for trading various asset classes, forex brokers offering bond trading have slowly but surely begun to evolve.

A bond is a loan made by a bondholder to the bond issuer. This transaction is premised on the bondholder promising and sticking to commitments to pay back the original amount at a specific future date, with fixed interest payments along the way.

A bond is like an "IOU" agreement. Bonds are relatively lower risk than stocks because of the signed commitment to repay the original amount and the interest payments.

Bonds are traded in two ways. Firstly, they can be bought in the primary market through open market operations conducted by the central banks or via the banks. In the secondary market, bond-holders can sell off their bond assets to other traders at a determined price which is quoted relative to 100 or a percentage of the bond's face value. Bond prices can fluctuate. It would help if you distinguished this from the bond yield, which is the interest rate payable by the bond issuer to the bondholder. The bond yield can change value according to changes in the interest rate within the country where these bonds are traded.

On selected forex platforms, traders can trade several bond assets as contracts-for-difference (CFD) assets. This means that the traders do not physically hold the active bond instruments but are speculating on the changes in the bond yields of the bond instrument over time.

It is hard to find forex brokers offering bond trading. That is why we have taken the time to curate a list of the best forex brokers offering bonds in the market.

Why Bond Trading?

Why should traders consider trading bonds on forex platforms?

A) The yields in the bond market, especially the long-term yields, give clues as to the interest rate expectations. These expectations produce volatility in several currency pairs, spot metals and indices.

B) Bonds are of comparatively lower risk than currency or commodity trading. Traders interested in trading bond instruments have fewer fundamentals to contend with than, say, currencies, which are subject to the influence of several data sets on the economic news calendar.

How Does Bond Trading on Forex Broker Platforms Work?

The bond assets are CFD instruments which come with lot sizing. Traders can speculate on the bonds by going long if the expectation is to profit from rising prices or going short if the trader feels prices will fall. The bonds traded on the forex brokers offering bond trading are all government bonds. These are bonds issued by national governments, including the US Treasuries (most popular), German bonds (BUND) and bonds of other European and Asian economies.

Traders trade bonds using the expectations of future changes in interest rates. This is usually the trigger for changes in bond prices. A look at the US 10-year long-term note shows that there has been a lot of volatility since the Federal Reserve resumed its rate tightening cycle in early 2022. This has triggered new expectations of further tightening well into 2023, increasing volatility on this asset.

These interest rate changes are not just happening in the US alone. It is happening all over the world. Interest rates dropped to near-zero levels (and even into negative territory in some countries) as central banks battled to revive the global economy, battered by the 2020 COVID-19 pandemic. Cheap money flooded the system, leading to the most outstanding bull runs ever seen in the stock markets. But with interest rates going back up, this cheap money has dried up, and the bond market is starting to see renewed interest.

Bond trading can be done on a bi-directional basis. You can go long to bet on rising bond yields or short to benefit from falling yields. In an environment of rising interest rates, bond yields (interest payable on a bond contract by the bond issuer to the bondholder) will also rise. Indeed, the interest rates serve as a benchmark for bond yields. In contrast, bond prices (the price paid by an entity buying a bond from another entity in the secondary market) will fall. The reverse is seen in a low-interest-rate environment.

Forex Brokers Offering Bond Trading: A Typical Trade Example

Here is a trade example showing just how you can trade a government bond on the forex brokers offering bond trading platforms.

What is traded on the platforms of forex brokers offering bond trading is the CFDs on the changes in bond prices, not bond yields. So here are the scenarios.

A) Short Trade Setup

The trader should set up a short position if the expectation is for interest rates to rise. This situation leads to a drop in bond prices even as bond yields increase. Since you expect bond prices to drop, you should short the bond in question. Assuming you expect the Federal Reserve to keep hiking interest rates, you should expect to sell the 10-year US Treasury Note. If you short 1 Standard Lot on this asset for $100.50, your profit expectations are met if the price drops below $100.50 by the time the trade is closed.

Assuming the bond's price drops to $98.50, and you trade a standard lot based on a leverage of 1:500, what is your profit?

• Tick value of a bond CFD contract = $1 per micro-lot, $10 per mini-lot or $100 per lot.
• Number of pips = (100.50 - 98.50) = 2.0 points
• Trade profit =2 X 100 = $200, where 100 is the tick value of a Standard Lot.

B) Long Trade Setup

The European Central Bank (ECB) was expected to raise rates but unexpectedly decided to leave rates steady after the apex bank's board meeting, citing risks to its economy and recent data showing that inflation was marginal. This decision has led to a drop in the yields on the German 10-year BUND. You decide to go long to benefit from the decision.

Assuming the price was 138.62 at trade entry and rose to 139.02 after trading with 5 Standard Lots, what would be the outcome?

• Five standard lots equate to $500 per tick.
• Outcome is (139.02 - 138.62) X $500 = $200.

Please note: CFDs on bonds are futures contracts subject to expiration. Suppose you trade expiry contracts and leave your trades running. In that case, they will be closed once they expire and are settled in profit or loss, depending on the expiry price relative to your entry price and trade direction. You should find out from any forex brokers offering bond trading if expiry or continuous contracts are offered.

Forex Brokers Offering Bond Trading: Trader Advantages

There are benefits to trading this asset class on FX platforms.

1. You can use bond price information to trade gold.
2. Bond prices are influenced by a minimal, assured set of market fundamentals.
3. You can use the info on bond charts to predict the direction of a stock index such as the Nasdaq 100.

Conclusion

Trading with forex brokers offering bond trading presents some advantages to the trader. Bond prices and yields are influenced by specific market fundamentals, making them relatively easier to trade. Look through the list on this site and open an account to start trading bond prices today.