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Spread Betting On Interest Rates
You will find these markets in the Rates or Bonds product listing of your spread betting or contract for difference (CFD) company. They can be easily traded using a normal financial spread betting or CFD account, but there are some important differences between money market trading and other types of trading, where the price is driven by shares or foreign exchange rates. In the UK the most popular interest rate spread bet is called short sterling. This represents the market's future expectations of the change in UK base rates. It does not represent the current rate, it represents where traders think the interest rate will go next. Traders of short sterling are trying to read the minds of the Bank of England's Monetary Policy Committee by looking carefully at the minutes of their last meeting, who is sitting on the committee, and how they voted at the last meeting. They also look carefully at other major UK economic indicators, for example inflation, to try to anticipate how the Bank will react. The short sterling spread bet or CFD is based on the expected interest rate subtracted from 100. The lower the price, the higher the market is expecting interest rates to move in the near future. Obviously, if traders believed that UK interest rates were going to remain at 0.5% indefinitely, that price would remain static at 99.5 (or 9950). However, the market is expecting that, as inflation in the UK goes up, the Bank of England will at some point be forced to raise rates. The market instrument driving this price is usually the three month interest rate futures contract quoted on one of the major futures exchanges. A typical quote from a spread betting or CFD company for Short Sterling might be 99.19/99.20, or 9919/9920 with the decimal point removed. The price on the left is the bid, or sell price. The price on the right is the offer, or buy price. If you thought that UK interest rates would be CUT further, you might buy short sterling at 9920. If you thought that the Bank of England was going to RAISE rates, you would sell short sterling, using the bid price. The biggest difference between trading interest rates and other financial spread betting markets is that you have to be constantly thinking inversely: if UK interest rates go UP (or look like they might go up), then the price of short sterling will go DOWN. Because spread betting lets you trade prices that are going up or down, it is an ideal format for trading interest rates. The price of short sterling is moving all the time, not just when the Bank of England makes its monthly interest rate decisions. In this respect, it is like any other spread betting market. You stake an amount of money per point the price is going to move during the lifetime of your trade. In the above example, if you thought short sterling was going to fall in price, you might stake £4 per point at 9919. If that price then drops to, say, 9899, you would make £80 (a drop of 20 points). Spread betting and CFD companies don't just quote prices on short sterling. It is also possible to speculate on other interest rates. The Eurodollar market is also readily available from spread betting companies. This works in a similar way to short sterling, but in this case it uses LIBOR (London Interbank Offered Rate) rather than the Bank of England base rate. LIBOR is the rate charged by banks to lend US dollars to other institutions. It is seen by traders as a key benchmark of how easy it is for businesses and households to borrow from banks. Other popular spread betting markets include Euribor, based on the rate charged by banks within the eurozone to lend to each other, and Euroswiss, which is based on the rate paid out for Swiss franc deposits held by banks outside Switzerland. The Euroswiss rate is often used by traders in conjunction with trades using the Swiss franc (CHF) to try to predict how the Swiss franc will perform against other currencies. When using financial spread betting or CFDs to trade rates, investors have to think in slightly longer timeframes than for some other spread betting markets. This is because interest rate prices move much more incrementally than, for example, shares, particularly in a market like short sterling. Because spread betting companies offer you margin trading when you open a spread betting account, it is still possible to make profits comparable with other spread betting markets, but you will need to focus on the same economic signals that other traders are looking at, signals which will ultimately impact rate decisions. Of course, during the financial panic in 2008, when the interbank market dried up overnight, these markets moved very quickly, and interbank rates can still move very suddenly if there is an abundance of fear. This is why it is still important to use a stop loss to protect yourself against sudden changes in price. Article Directory: http://www.articledashboard.com www.etxcapital.co.uk/Spread-Betting/What-is-Spread-Betting.aspx www.etxcapital.co.uk/Spread-Betting/Benefits-of-Spread-Betting.aspx |
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