Sovereign Debt: Implications on an Investor’s Portfolio

In this article, we will talk about how issues concerning sovereign debt can affect an investor’s portfolio. Sovereign debt is a term that was probably unknown a decade or two ago, and many of today’s younger investors have probably never come across the term until two years ago when Greece, Spain, Ireland and Portugal gave us a reason to get to know what the concept was all about.

Bond Trading Brokers UK

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    IC Markets provide trading opportunities across nine bonds, known for their deep liquidity and competitive pricing. The broker distinguishes itself by offering leverage as high as 1:200. Additionally, clients have access to top-tier charting platforms, MT4 and MT5.

    Instruments Regulator Platforms
    CFDs, Forex, Stocks, Indices, Commodities, Bonds, Futures, Crypto ASIC, CySEC, FSA, CMA MT4, MT5, cTrader, TradingView, TradingCentral, DupliTrade, Quantower
    Min. Deposit Min. Trade Leverage
    $200 0.01 Lots 1:30 (ASIC & CySEC), 1:500 (FSA), 1:1000 (Global)
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    IG consistently ranks in the top 5 for its versatile bond offerings. Traders have the opportunity to invest in global bond futures and ETFs through CFDs, share dealing, or spread betting, all with competitive spreads starting from just 1 point. For those more serious about trading, correlated interest rate products are available, alongside extra investment perks like dividend coupons.

    Instruments Regulator Platforms
    CFDs, Forex, Stocks, Indices, Commodities, ETFs, Futures, Options, Crypto, Spread Betting FCA, ASIC, NFA, CFTC, DFSA, BaFin, MAS, FSCA, FINMA, CONSOB, AFM Web, ProRealTime, L2 Dealer, MT4, TradingView, AutoChartist, TradingCentral, ProRealTime
    Min. Deposit Min. Trade Leverage
    $0 0.01 Lots 1:30 (Retail), 1:222 (Pro)
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    IC Trading provides nine bonds, featuring long or short positions via CFDs, with leverage up to 1:200. Traders can access government bonds across major regions such as the United States, Japan, and Europe.

    Instruments Regulator Platforms
    CFDs, Forex, Stocks, Indices, Commodities, Bonds, Cryptos, Futures FSC MT4, MT5, cTrader, AutoChartist, TradingCentral
    Min. Deposit Min. Trade Leverage
    $200 0.01 Lots 1:500
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    At eToro, you can trade bonds by investing in ETFs and using the YieldGrowth Smart Portfolio. These platforms are user-friendly and provide the benefits of fixed-income products with ease of access.

    Instruments Regulator Platforms
    CFDs, Forex, Stocks, Indices, ETFs, Smart Portfolios, Commodities, Futures, Crypto, NFTs FCA, ASIC, CySEC, FSA, FSRA, MFSA, CNMV, AMF eToro Web, CopyTrader, TradingCentral
    Min. Deposit Min. Trade Leverage
    $50 $10 1:30
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    Trade Nation provides a selection of well-known bond futures through its exclusive TN Trader platform. With a leverage ratio of 1:5, low fixed spreads, and no required minimum deposit, Trade Nation is an excellent choice for novice traders keen to enter the bond market with ease. The platform also features robust analysis tools, such as a signal centre, to identify market opportunities effectively.

    Instruments Regulator Platforms
    Forex, CFDs, Indices, Shares, Commodities, Futures, Bonds, Spread Betting, Cryptos (Bahamas Entity Only) FCA, ASIC, FSCA, SCB, FSA MT4
    Min. Deposit Min. Trade Leverage
    $0 0.1 Lots 1:500 (entity dependent)
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    Accessible on both MT4 and MT5 platforms, Vantage's bond offerings span various government and corporate markets. Traders can engage with just 1 lot and speculate on fluctuating prices. A comprehensive selection of educational resources and market analysis tools is also available for those aiming to enhance their short-term trading strategies.

    Instruments Regulator Platforms
    CFDs, Forex, Stocks, Indices, Commodities, ETFs, Bonds, Spread betting FCA, ASIC, FSCA, VFSC ProTrader, MT4, MT5, TradingView, DupliTrade
    Min. Deposit Min. Trade Leverage
    $50 0.01 Lots 1:30
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    City Index is a leading option for bond CFD traders due to its commission-free model and attractive spreads starting at 0.02 points. A rich array of bond market news and analysis, like the Trading Central dashboard, is available. Traders of all levels can start without a minimum deposit or explore bonds risk-free with a 12-week demo.

    Instruments Regulator Platforms
    CFDs, Forex, Stocks, Indices, Commodities, Crypto, Futures, Options, Bonds, Interest Rates,ETFs,Spread Betting FCA, ASIC, CySEC, MAS Web Trader, MT4, TradingView, TradingCentral
    Min. Deposit Min. Trade Leverage
    $0 0.01 Lots 1:30

Safety Comparison

Compare how safe the Sovereign Debt: Implications on an Investor’s Portfolio are and what features they offer to protect traders.

Safety Comparison
Broker Trust Rating FCA Regulated Negative Balance Protection Guaranteed Stop Loss Segregated Accounts
IC Markets 4.6
IG Index 4.9
IC Trading 2.8
eToro 4.5
Trade Nation 4.3
Vantage FX 4.6
City Index 4.2

Payments Comparison

Compare which popular payment methods the Sovereign Debt: Implications on an Investor’s Portfolio support and whether they have trading accounts denominated in British Pounds (GBP).

Payments Comparison
Broker GBP Account Debit Card Credit Card Neteller Skrill Apple Pay
IC Markets
IG Index
IC Trading
eToro
Trade Nation
Vantage FX
City Index

Mobile Trading Comparison

How good are the Sovereign Debt: Implications on an Investor’s Portfolio at mobile trading using apps or other mobile interfaces.

Mobile Trading Comparison
Broker Mobile Apps iOS Rating Android Rating Smart Watch App
IC Markets iOS & Android 3.1 4.2
IG Index iOS & Android 4.6 4
IC Trading iOS & Android 4.8 4.6
eToro iOS & Android 4 3.8
Trade Nation iOS & Android 4.1 3.5
Vantage FX iOS & Android 3.6 3.9
City Index iOS & Android 3.8 3.1

Beginners Comparison

Are the Sovereign Debt: Implications on an Investor’s Portfolio good for beginner traders, that might want an affordable setup to get started, along with good support and educational resources?

Beginners Comparison
Broker Demo Account Minimum Deposit Minimum Trade Support Rating Education Rating
IC Markets $200 0.01 Lots 4.5 3.5
IG Index $0 0.01 Lots 4.5 5
IC Trading $200 0.01 Lots 2.8 2.2
eToro $50 $10 2.5 4
Trade Nation $0 0.1 Lots 4.5 3.8
Vantage FX $50 0.01 Lots 4.4 4
City Index $0 0.01 Lots 4 4.3

Advanced Trading Comparison

Do the Sovereign Debt: Implications on an Investor’s Portfolio offer features that allow for more advanced trading strategies?

Advanced Trading Comparison
Broker Automated Trading Pro Account Leverage VPS AI Low Latency Extended Hours
IC Markets Expert Advisors (EAs) on MetaTrader, cBots on cTrader, Myfxbook AutoTrade 1:30 (ASIC & CySEC), 1:500 (FSA), 1:1000 (Global)
IG Index Expert Advisors (EAs) on MetaTrader, build your own on ProRealTime 1:30 (Retail), 1:222 (Pro)
IC Trading Expert Advisors (EAs) on MetaTrader, cBots on cTrader 1:500
eToro Automate your trades via CopyTrader - follow profitable traders. Open and close trades automatically when they do. 1:30
Trade Nation Expert Advisors (EAs) on MetaTrader 1:500 (entity dependent)
Vantage FX Myfxbook AutoTrade, Expert Advisors (EAs) on MetaTrader 1:30
City Index Expert Advisors (EAs) on MetaTrader 1:30

Detailed Rating Comparison

Use this heatmap to compare our detailed ratings for all of the Sovereign Debt: Implications on an Investor’s Portfolio.

Detailed Rating Comparison
Broker Trust Platforms Mobile Assets Fees Accounts Support Research Education
IC Markets 4.6 4 3.7 3.5 4.6 4 4.5 4 3.5
IG Index 4.9 4.9 4.3 4.5 3.5 4 4.5 4.9 5
IC Trading 2.8 4 4.7 3 4 3.5 2.8 3 2.2
eToro 4.5 2.8 3.9 3.8 3.4 4.1 2.5 4.3 4
Trade Nation 4.3 4.3 3.8 3.5 4.5 4.5 4.5 3.8 3.8
Vantage FX 4.6 4.3 3.8 4.5 4.4 4.5 4.4 4 4
City Index 4.2 4 3.5 4.5 3.8 3.8 4 4.3 4.3

Our Take On IC Markets

"IC Markets provides excellent pricing, swift execution, and easy deposits. With cutting-edge charting tools like TradingView and the Raw Trader Plus account, it continues to be a preferred option for intermediate and advanced traders."

Pros

  • IC Markets provides reliable 24/5 support, especially for account and funding queries, drawing from direct experience.
  • IC Markets provides some of the industry's narrowest spreads, offering 0.0-pip spreads on major currency pairs. This makes it an extremely cost-effective choice for traders.
  • As a well-regulated and reputable broker, IC Markets focuses on client safety and transparency to provide a dependable global trading experience.

Cons

  • Interest is not paid on idle cash, a feature gaining popularity with alternatives such as Interactive Brokers.
  • Certain withdrawal methods incur fees, including a $20 charge for wire transfers. These costs can reduce profits, particularly with frequent withdrawals.
  • Although there are four top-tier third-party platforms available, the absence of in-house software or a trading app tailored for novice traders is notable.

Our Take On IG Index

"IG offers a complete package with an intuitive online platform, top-tier beginner education, advanced charting tools through its TradingView integration, real-time data, and swift execution for seasoned traders."

Pros

  • IG stands out with its extensive range of instruments, offering stocks, forex, indices, commodities, and cryptocurrencies. Additionally, it has recently introduced US-listed futures and options, along with an AI Index. These options enhance opportunities for diversification in trading.
  • The IG app provides an excellent mobile trading experience with an intuitive design, earning it the Runner Up position in our 'Best Trading App' award.
  • The ProRealTime advanced charting platform remains free, provided traders meet modest monthly activity requirements.

Cons

  • Beginners may find IG's fees complicated, as they vary depending on the trades or services. This could cause confusion and unexpected costs.
  • Based on tests, stock and CFD spreads remain less competitive than the lowest-cost brokers, such as CMC Markets.
  • IG has ended its swap-free account, diminishing its attractiveness to Islamic traders.

Our Take On IC Trading

"IC Trading offers an ideal environment, featuring top-tier execution speeds of around 40 milliseconds, extensive liquidity, and advanced charting tools, perfect for scalpers, traders, and algorithmic traders."
Christian Harris
Christian Harris
Reviewer

Pros

  • The streamlined digital account setup allows traders to commence trading swiftly, eliminating lengthy paperwork. Testing shows the process takes mere minutes.
  • Trading Central and Autochartist provide valuable technical analysis and actionable ideas. These tools are readily available within the account area or on the cTrader platform.
  • IC Trading provides exceptional flexibility, allowing traders to open as many as 10 live accounts and 20 demo accounts. This enables the management of distinct profiles for various activities, including manual and algorithmic trading.

Cons

  • Unlike IC Markets, IC Trading lacks support for social trading via the IC Social app or the ZuluTrade platform.
  • Although IC Trading operates under the reputable IC Markets group, it is licensed by the FSC in Mauritius, a regulator known for its limited financial transparency and lack of robust safeguards.
  • The educational materials require significant enhancement unless accessed via the IC Markets website. This limitation is particularly disadvantageous for beginners seeking a thorough learning experience, especially when compared to industry leaders such as eToro.

Our Take On eToro

"eToro's social trading platform excels with its outstanding user experience and lively community chat, aiding beginners in spotting opportunities. It offers competitive fees on numerous CFDs and real stocks, alongside exceptional rewards for seasoned strategists."

Pros

  • The web platform and mobile app receive higher user reviews and app rankings compared to leading competitors like AvaTrade.
  • eToro is a globally recognised brand, operating under top-tier international regulations. It boasts a community of over 25 million users.
  • Diverse investment portfolios are accessible, encompassing traditional markets, technology, cryptocurrency, and beyond for traders.

Cons

  • There are no assured stop-loss orders, which could be a valuable risk management tool for novice traders.
  • The minimum withdrawal is set at $30, accompanied by a $5 fee. This may impact traders with limited funds, particularly those just starting out.
  • The only significant contact option, besides the in-platform live chat, is limited.

Our Take On Trade Nation

"Trade Nation is ideal for novice traders seeking diverse markets on an easy-to-use platform. It offers no minimum deposit, complimentary funding options, and robust educational resources."

Pros

  • A variety of trading platforms and apps, such as MT4, make the brand suitable for experienced traders.
  • Beginners benefit from a modest initial deposit.
  • Access a comprehensive selection of investments through leveraged CFDs, enabling both long and short strategies.

Cons

  • Reduced legal safeguards with an offshore entity.

Our Take On Vantage FX

"Vantage is an ideal choice for CFD traders looking for a well-regulated broker with access to the dependable MetaTrader platforms. With a swift sign-up process and a minimum deposit of $50, starting trading is simple and fast."

Pros

  • The trading software suite is outstanding, featuring the acclaimed MT4 and MT5 platforms.
  • The broker recently expanded its range of CFDs, offering more trading opportunities.
  • With a minimal deposit requirement of just $50 and no funding fees, this broker stands out as an excellent option for novice traders.

Cons

  • It's unfortunate that some clients must register with the offshore firm, which provides reduced regulatory safeguards.
  • Based on tests, average execution speeds of 100ms to 250ms are slower compared to other options.
  • Regrettably, cryptocurrencies are accessible solely to clients in Australia.

Our Take On City Index

"City Index suits active traders perfectly, offering rapid execution speeds averaging 20ms and a customisable web platform with over 90 technical indicators. Its educational resources are exceptional. For UK traders interested in spread betting on 8,500+ instruments tax-free, City Index is an excellent option."

Pros

  • City Index has significantly improved the trading experience. In 2024, they introduced Performance Analytics, providing insights into trades and discipline. The revamped mobile app now includes integrated market research and swipe-access news.
  • City Index offers access to over 13,500 markets, including forex, indices, shares, commodities, bonds, ETFs, and interest rates. The platform's inclusion of niche markets such as interest rates provides traders with unique opportunities not commonly available on other platforms.
  • City Index is under the regulation of leading authorities, such as the FCA in the UK, ASIC in Australia, and MAS in Singapore. Its parent company, StoneX Group Inc., is publicly listed, which enhances its credibility.

Cons

  • Unlike brokers like AvaTrade and BlackBull, City Index lacks options for passive trading, such as social copy trading or real ownership of stocks and ETFs. This limitation may reduce its appeal to traders seeking a more hands-off approach.
  • Although many brokers, such as eToro, have broadened their crypto offerings, City Index restricts its clients to crypto CFDs. This limited selection may not meet the needs of traders seeking a wider variety of altcoins.
  • City Index does not offer an Islamic account with swap-free conditions, making it less attractive to Muslim traders than brokers such as Eightcap and Pepperstone.

Sovereign debt is all about debt instruments that have been issued by national governments to raise money to fulfil their budgetary obligations. Another name for sovereign debt is national debt or public debt. Almost every country of the world owes money in the form of debt instruments/bonds. Governments are responsible for most of the spending on infrastructure, salaries and other sectors of the economy on which the citizenry and private sector can function. These expenses are huge and unless a government has enough resources from its natural and human capital, there is really no way to foot the bills. As such, the money available to governments to fund their projects and expenditure for the fiscal year has to come from borrowed funds. Governments can decide to borrow from financial institutions such as the International Monetary Fund (IMF) and World Bank, or can decide to access cheaper and more flexible financing in the form of issuance of debt instruments. A common debt instrument issued by national governments is bonds. Under this arrangement, a government is leveraging on its ability to make money from sale of its natural resources (if any), increase in taxation, reduction in public spending, or by its ability to print more money using the instrumentality of the central bank, to tell investors to lend it money in return for an interest to be paid along with the principal in years to come. The maturity of the bonds (i.e. date at which the bond money is to be paid back to investors) is set at anything between three months to 30 years.

Governments are regarded as being too credit-worthy to default on bond payments, but the global financial crisis and the effect that this has had on several countries, especially the members of the European Union, has begun to challenge this long-held belief. The national governments of Greece, Spain, Ireland, Iceland and Portugal have been hit by financial crises that have challenged their ability to repay the sovereign debt that they acquired over the years. Part of the problem has been that some of these debts were acquired before the adoption of the Euro in 1999, and now having to pay off these debts in Europs have made it more expensive for these countries to pay off these debts (currency mismatch).

What happened after these problems developed? Let us see the impact of these crises on the stock markets across Europe and on the currency of the Eurozone countries, the Euro.

 

Impact of Sovereign Debt

Three well recognised phenomena follow a declaration by a national government on its inability or outright refusal to pay off its bond obligations as a result of cash flow problems.

1)    There is a currency crisis.

2)    There is also an economic crisis

3)    The banking sector of the country will also suffer.

Currency Crisis

The balance of payment deficits that occur after a sovereign debt crisis will usually lead to an attack on the nation’s currency by speculators, leading to sharp falls in the foreign exchange market. As the currency starts to drop, citizens will dump the currency for more stable foreign currencies, leading to even steeper falls in the value of that currency. Let us look at what happened to the Euro when the sovereign debt crisis began to unravel.

Early 2010: Greece is hit by sovereign debt crisis: The exchange rate of the Euro versus the Swiss Franc drops from 1.4586 to just below 1.2770 between late May and September 2010. The Euro also dropped close to 1800 pips against the US Dollar from 1.3693 in March 2010 to about 1.1850 in June 2010.

November 2010: The full extent of Ireland’s sovereign debt crisis became apparent to the markets. It soon became clear that Ireland would require a huge bailout. The currency used in Ireland is the Euro, which took another massive hit in the forex market, selling off from just above 1.4133 to the US Dollar to 1.2970 in three weeks! The Euro also sold off against the Swiss Franc from 1.3743 to a low of 1.2399 in the same month. The Swiss National Bank was forced to introduce a minimum exchange rate peg on the EURCHF to stop the slide.

April/May 2012: The Euro once again experienced a drop from levels above 1.3300 to just above 1.2040 as it became apparent that the Spanish banking system was in dire need of a bailout in order to prevent a total collapse.

These three modern-day instances show clearly the bearish attacks on the Euro as a result of sovereign debt crisis.

Economic Crisis

Invariably, the credit rating of affected countries drop and leads to widening spreads on their treasury yields.

Banking Crisis

With a systemic collapse of the financial system, a run on the banks is inevitable unless there is a timely intervention by the central bank or international financial institutions like the IMF or World Bank.

Impact on Investor Portfolio

Problems create opportunities. Anytime there is a speculative attack on the currency of a debt defaulting nation, investors can make a lot of money from shorting that currency. The total loss sustained by the Euro in the various speculative attacks it suffered was more than 6,000 pips, which would have made standard lot traders shorting the Euro very rich indeed.

If an investor is holding the stocks of banks in a nation close to bond repayment default, that investor could be wiped out. However, professional investors can hedge those trades in the options market and cover losses on long positions in the affected stocks. This requires professional investment advice and is not suitable for everyone.

The final take on this is that a bond default situation could create losses for investors in some asset categories while creating money-making opportunities in other markets. If an investor knows how to play the markets at this time, their portfolios will actually come out healthier.