Bonds and trading don’t often appear in the same sentence in the financial markets. You’ll have better luck talking about bond investment than talking about bonds trading. Yet, the fact remains that it is very possible to trade bonds and smart investors often trade bonds in order to make their portfolio truly diversified. Interestingly, many people might agree with you that that bond trading has its usefulness, but most people might be skeptical about trading bonds as binary options.
This piece seeks to disabuse your mind about any skepticism that you might hold about trading bonds or trading bonds as binary options.
What are bonds?
A bond is a debt instrument that the government and corporations use in order to access ‘loans’ from the public. The government and large corporation often bypass traditional financial institutions to raise loans from the public. For one, loans from traditional financial institutions often attract exorbitant rates; whereas, the rates payable on debt raised through bonds is often significantly lower. Interestingly, bonds provide a win-win situation to the organization seeking low-interest debts and investor seeking low-risk assets.
How do people profit from the bond markets?
The commonest way of profiting from the bond market is to buy bonds as an investment. You’ll wait through the term of the bond and you’ll be paid back your capital and accruable interest.
The second way to profit from bonds is to trade bond on bond exchanges – trading bonds on exchanges is often a function of market speculation on where bond prices are going.
You can also profit from the bonds market by trading or speculating on bond yields. Many binary options brokers provide platforms for people who want to speculate on bond yield. Bond yields refers to the interest payable on bonds, you can trade the chances in the yield as a function of hedging strategies of players in the bond market.
What you need to know about trading bonds as binary options
Before you start trading bonds, you’ll need to understand that the different types of bonds have credit ratings that might be used as a gauge of their risk-reward propositions. You’ll need to access your risk appetite before you start trading bonds so that you can avoid potential pitfalls. Credit rating agencies such as Moody and Fitch often rate bonds. Corporate bonds tend to have the lowest ratings; municipal bonds are rated higher than corporate bonds. State bonds are rated higher than municipal bonds, and Federal Government bonds tend to carry the highest credit ratings.
If you want to trade bonds, you’ll also need to consider the interest yield and maturity of the bonds you want to trade – these two factors are as important as PE ratios to stock traders. An important point to note is that bonds with shorter maturity tenure tend to have lower interest yields than bonds with longer tenure.
The most important factors influencing bond prices
If you want to trade bonds as a pureplay trade or as binary options trade, you’ll need to have an excellent understanding of fundamental analysis. Of course, you might find some use for technical analysis but the largest part of your trading decision will be a function of fundamental analysis. Below are some of the factors that could affect how bonds trade in the binary options market.
Interest rates and bonds tend to display an inverse relationship; hence, you’ll need to study economic trends in order to know where interest rates are headed.
As mentioned earlier, different bond issuers have different credit ratings based on their credit worthiness. Bonds issued by organizations with poor credit ratings tend to have the highest rates while bonds issued by issuers with higher credit ratings tend to have lower yields.
Economic data such as labor report, Consumer Price Index, and Housing stats are some of the data that could affect how bonds trade in the market.
You should also watch out for events that have political and economic implication. The Brexit vote in which Britain voted to leave the EU as in important geopolitical event that could affect bonds. The recently concluded U.S. election could also influence how bonds are traded in the market.