Interest Rates: How To Spread Bet When Markets Go Up
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Betting interest rates and bonds to go up cannot happen jointly. This is because the two securities are almost like opposites. If interest rates go down, then the price of bonds goes up on markets.
This is because a trader betting on interest rates has two choices. Short term and long term interest rates are the two choices. Short term interest rates are typically offered on a 3 month contract.
When betting on long term interest rates it is reflected in bonds. A position on a bond, a trader predicts future long term rates.
Spread betting interest rates to go up means a sell bet is made. Predicting interest rates to rise is predicting the sterling to fall. A quote on the short sterling is offered at 9378-9382 by a firm.
The bet has a September expiry, a trader sells £10 per point at 9378. The September interest rates increased to 7.2 which means a profit. This means the closing price was 9280 resulting in a profit.
The profit is figured just like many other spread betting trades. The point difference is multiplied by the wager a trader set. In this trading case, the profits a trader receives are £980.
The trader could have been incorrect on ones bet of interest rates. In this case, the short sterling could have increased changing spread. The new spread offered was 9400-9404 when interest rates went up.
The trader would have suffered a loss on this interest bet made. To get out of the interest trade the trader would have had to buy. The trader would buy rates at 9404 resulting in a loss of £260.
When betting interest rates to increase, traders make a sell bet. A spread is quoted 9600-9604 and rates increased, a spread decreases. This interest spread has an underlying interest rate of 4% to 3.96%.
The interest rates increased to 5% and generated a new spread. The new spread is 9500 - 9504 which is lower than the other spread. Traders carefully watch climbing rates and spread changes offered.
Betting interest rates to go up is similar to other spread bets. It takes practice in knowing how numbers move in relation to others. Interest rates and bonds are not impossible for traders to understand.
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* Results are the outcome of backtesting and are hypothetical since not all trades were taken. Future results may be higher or lower than past results.
