How Not to Lose Money in Bonds
It is true that bonds are supposed to be a fail-safe type of investment, but the truth is that a bond investment is just like any other investment: they are not fail-proof and it is possible to lose money and to lose it big in bond investments. Just ask investors who put money in some of the bankrupt governments or banks in the Eurozone and they can tell you better how they are still trying to save what is left of their fingers after getting them burnt.
Exactly how do losses occur in the bond market and how can investors prevent themselves from losing money investing in bonds? Here are a few tips to serve as a guide.
Bond Trading Brokers UK
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AvaTrade offers European and Japanese bond trading through CFDs, allowing users to speculate on rising and falling prices. Spreads on treasuries are tight and leverage up to 1:5 is available, amplifying both returns and losses. AvaTrade excels by offering bonds on MT4 and MT5 – platforms that are great for short-term traders and algo traders.
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CMC Markets offers an excellent selection of 50+ government bonds and interest rates with spreads as low as 1 point. Traders can take advantage of the broker’s exclusive market insights and pattern recognition scanner to level up their bond trading strategy. Plus, high-volume traders can earn spread discounts of up to 21% on treasuries in the CMC Price+ scheme.
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Spreadex offers spread betting and CFDs on 19+ global bonds and interest rates, including the Japanese Government Bond and Euribor futures. Spreads start from 2 and leverage is available up to 1:30. Beginners and seasoned traders can elevate their bond trading strategies using best-in-class platform features, including integrated macro data and advanced order types.
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Interactive Brokers maintains its position as a top-ranking bond broker, with a whopping selection of over 1 million products. Helpfully, the firm provides a comprehensive Bond Search tool to narrow down the wealth of popular treasuries and notes, as well as the lesser-known municipal securities. Commissions are also competitive, starting at 0.2 basis points for the first $1 million of face value.
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City Index remains a top choice for bond CFD traders, thanks to its commission-free pricing model and competitive spreads from 0.02 points. There’s a wealth of bond market news and analysis to utilize, including the Trading Central dashboard. Beginners can also get started easily with no minimum deposit, or experience the bond market risk free in the 12-week demo.
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You can trade bonds at eToro by investing in ETFs and its YieldGrowth Smart Portfolio. Simple to navigate, they offer the advantages of fixed-income products with one-click access.
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Interactive Investor offers an impressive selection of 90+ UK bonds and gilts - plenty for investors to build a diversified portfolio. For a flat monthly account fee, traders can hold their bonds in a SIPP, ISA, JISA or regular trading account, with a reasonable £3.99 fee per trade. The broker’s investment app is feature-rich yet suitable for beginners.
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OANDA offers CFDs on a handful of the most popular US, European and UK bond products, including the Bund and USD T-Bond. Spreads are reasonable from 1.4 pips and leverage is set to 1:5. The broker’s economic overlay tool also delivers instant updates on economic announcements impacting the bond markets - ideal for short-term news trading strategies.
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Trade Nation offers a handful of popular bond futures on their proprietary TN Trader terminal. The 1:5 leverage, low fixed spreads and $0 minimum deposit make Trade Nation ideal for beginners looking to start trading bonds easily. There are also some decent analysis tools available, including a signal centre to help uncover bond market opportunities.
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Available on both MT4 and MT5, Vantage’s bond products cover a range of government and corporate markets. You can speculate on rising and falling prices with as little as 1 lot. There’s also an excellent range of educational materials and market analysis tools for those looking to elevate their short-term strategies.
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IG maintains a top 5 position in our ranking for its flexible and diverse bond offering. Traders can invest in global bond futures and ETFs via CFDs, share dealing or spread betting, with competitive spreads from 1 point. Serious traders can also explore correlated interest rate products and enjoy additional investment benefits such as dividend coupons.
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Markets.com is an excellent choice for traders looking for US, German and UK bond CFDs on the MT4 and MT5 platforms. Traders can go long or short on popular products like the US TNote 10Y and the Gilt 10Y Bond. Spreads are competitive based on tests, averaging 0.06 pips with leverage up to 1:5, in line with competitors.
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VT Markets remains a popular choice for bond traders looking for zero commissions and low spreads. You can trade popular products like the Bund and UK Long Gilt futures CFDs with quotes as low as 0.4 pips, plus competitive leverage up to 1:100. The broker has also partnered with Trading Central to deliver the market-leading ProTrader tools - perfect for serious bond market analysts.
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Trade.com is a trustworthy online broker with a global presence. The broker offers 2,100+ CFDs in major markets, as well as futures, options and more. The broker offers best-in-class platforms and superior analysis tools for experienced traders. The broker is also regulated by top-tier authorities including the FCA and CySEC.
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Grand Capital is a MetaTrader broker with welcome bonuses, trading competitions and an intuitive copy trading service. Several account types and 400+ assets provide trading opportunities for various types of investors and strategies. New users can also open an account and start trading in a matter of minutes.
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Dukascopy offers popular government-issued US, UK and German bond CFDs with commissions starting at $52.50 per million, though this drops to $7.50 for high-volume traders. The broker is a great choice for seasoned bond traders looking for comprehensive analysis tools and automation features, including APIs and strategy builders.
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Pacific Union Prime is an FSCA and offshore-regulated multi-asset broker offering competitive fees and direct market access on forex, commodities, stocks, bonds and indices. The broker supports the popular MetaTrader 4 and MetaTrader 5 platforms and a proprietary mobile app. Fees vary by account type with no commission and spreads from 1.9 pips on the Standard account and $7 commission per lot and spreads from 0.4 pips on the Prime account.
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Firstrade clients can access an excellent range of fixed-income investments such as treasury bills, municipal bonds and secondary market certificates of deposit (CDs). The broker charges zero commissions on online trades and there is no minimum deposit to get started, making Firstrade a good pick for novice bond investors.
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ActivTrades is a UK-headquartered CFD and forex broker established in 2001. The brokerage is heavily regulated with licenses from the FCA, SCB, CSSF, BACEN & CVM and CMVM. Over 1000 CFDs are available spanning 7 asset classes. Over 93.60% of orders are executed at the requested price. ActivTraders also offers a selection of leading trading platforms, including MT4, MT5, TradingView and ActivTrader platforms.
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Swissquote is a Switzerland-based bank and broker that offers online trading and investing. The company has a high safety score and is listed on the Swiss stock exchange. The firm offers a huge range of products, from stocks, ETFs, bonds and futures to 400+ forex and CFD assets. Hundreds of thousands of traders have opened an account with the multi-regulated brokerage. Clients can get started in three easy steps while 24/7 customer support is available to assist new users.
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FXPrimus is an award-winning CySEC-regulated brokerage offering CFD trading on 200+ instruments via the MetaTrader 4, MetaTrader 5 and cTrader platforms. The choice between a competitive commission-free account and two affordable raw spread options make this an accessible broker for anyone seeking forex, stocks, indices and commodities with high leverage.
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FP Markets is an ASIC- and CySEC-regulated broker that offers forex and CFD trading on a broad range of assets through the MT4, MT5 and IRESS platforms. With trading available through standard and raw spread accounts on thousands of international stocks, forex, indices, commodities, cryptocurrencies, bonds and ETFs, this broker has some of the most comprehensive market coverage available. FP Markets also offers a full range of additional features, including educational resources and access to powerful software such as Autochartist.
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Global Prime is a multi-regulated trading broker offering 150+ markets. Traders can get started with a $200 minimum deposit and trade with leverage up to 1:100. The firm also has a high trust score and a good reputation with a license from the ASIC.
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Fortrade is a multi-asset, multi-regulated broker with branches regulated by the FCA, CySEC and ASIC among others. The brand offers trading opportunities on a wide range of instruments including stocks, bonds, commodities, forex, indices, cryptocurrencies and ETFs, with competitive fees and support for MetaTrader 4 and a proprietary platform.
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Admirals is an FCA- and ASIC-regulated broker with an excellent range of leveraged instruments, including forex, stocks, indices, ETFs, commodities, cryptos and more. The broker supports the MetaTrader 4, MetaTrader 5 and TradingCentral platforms. With both spread betting and CFDs available and thousands of instruments, this broker provides more flexibility than most rivals.
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Infinox is a UK-based and FCA-regulated broker that offers diverse trading products thanks to its STP and ECN account types and support for MetaTrader 4, MetaTrader 5 and a proprietary platform. Clients can also benefit from a free VPS that can support automated strategies and a social trading platform, catering to both beginner and seasoned traders.
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Saxo Markets is a multi-award-winning trading brokerage, investment firm and regulated bank. With a huge 72,000+ trading instruments, plus investment products and managed portfolios, clients have no shortage of opportunities. The trusted brand also offers transparent pricing and top-tier regulatory protection from 10+ agencies including FINMA, FCA & ASIC.
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Zacks Trade is a top pick for seasoned bond traders. With exclusive access to over 20 top-tier research providers, including Dow Jones and Morningstar, traders can stay ahead of the bond market easily. Commissions start from 0.025% of the face value plus $3 per government bond, and the broker’s proprietary terminal is packed with analysis features for active, high-volume traders.
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Just2Trade is a reliable multi-regulated broker registered with FINRA, NFA and CySEC. The company has 155,000 clients from 130 countries and stands out for its huge suite of instruments and additional features, including a social network, robo advisors and a funded trader programme.
Tips to Avoid Losing Money Investing in Bonds:
Tip No. 1: Never put all your faith in the credit rating agencies.
Did you know that Standard & Poor’s, one of the top-notch credit rating agencies, had Lehman Brothers still rated as Triple A just a month before the cards came crashing down at that company, triggering the 2008 global financial crisis? Or that AIG was still carrying its top credit rating at the time that the US Government stepped in with an 11th hour bailout that prevented what would have been a monumental catastrophe in the global financial system? Indeed, some of those subprime mortgages were all carrying AAA credit rating status at the time they all collapsed one by one.
The 2008 global financial crisis and the antecedents that led to it are a clear example of how unrestrained belief in the credit rating system can mislead investors. The aftermath of the global financial crisis in which the same credit rating agencies are still in business without any sort of punitive action taken against them for misleading investors, is another reason why every bond investor must perform his or her own due diligence before investing in any government, municipal or corporate bonds. If you are careless about this fact and lose money, chances are that the credit rating agencies will not give you your money back. So protect yourself before anything goes wrong.
Tip No. 2: Do some due diligence on the borrower
A bond issuer is a borrower, and just like any other borrower, you must be sure of the entity’s ability to pay you back your money. The problem with bonds is that the borrower or bond issuer is not depositing any collateral for your money. You are basically relying on the word of the bond issuer to pay you back based on the terms represented on your certificate. You cannot afford in these circumstances not to conduct some checks on the credit worthiness of the bond issuer to know if you have a good chance of getting your money back. For instance, supposing a company A is issuing a bond in order to clear debts at a time it has an overbloated overhead bill, and another company B is issuing a bond to expand a business operation which is profitable, which of the two companies would be more likely to pay back if conditions do not change? The answer should be pretty obvious.
Tip No. 3: Beware of Inflation
You need to be wary about investing in sovereign debts of countries that do not have a structured and institutionalized plan for dealing with inflation. Once a fixed-return bond is purchased and the interest payment is set, there is no way of changing this interest. So if the rate of inflation starts to rise and outstrips the interest payment on the bond, the bond is a loser. So only by a fixed-return bond in a situation where the inflationary rate is not subject to northward movements.
Tip No. 4: Hold Your Bonds to Maturity
This seems to be an area where many retail investors get it wrong. The investment disclaimer that advises investors to only “trade with money that they can lose” holds very true in the bond markets. A modification of this disclaimer would be to advise potential bond buyers not to use money that they require for essential expenditure for bond investments, so that they can actually leave any bond investments to mature. Allowing the bond to mature before selling is the only way that all interest payments plus the principal is obtained in full. Bond prices are subject to change, and selling a bond prematurely will lead to loss of money because such bonds end up being sold for a lesser price than they were bought.
Tip No. 5: Never invest in corporate bonds from the same sector
When investing in corporate bonds, it is always better to spread the risk by investing in bonds in different sectors. Never hold on to bonds in the same sector, so that a sectorial collapse doesn’t ruin your investment. You can imagine the fate of some investors who put all their bond investments in the housing market or subprime mortgage market in the US when the bubble popped.
Tip No. 6: Diversify your portfolio
This is a spin-off from the point mentioned above. There is wisdom in spreading your bond investments to cover different maturity dates, according to your circumstances or stage in life. For instance, a younger person may wish to invest in a 10 year bond for the education of his or her kids, a five year bond and a short-term bond. Those who are near retirement are obviously not going to benefit from a long term bond which is more risky anyway, so shorter term bonds may be more appropriate for this age group.
You can see from all the tips presented above that bond investments require vigilance and smart thinking on the part of the investor in order to safeguard them and not to lose money. When these tips are followed to the letter, the chances of losing money on a bond investment are far reduced.