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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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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IC Markets offer trading on 9 bonds with deep liquidity and excellent pricing. The broker also stands out by offering very high leverage up to 1:200, alongside access to leading charting platforms MT4 and MYT5
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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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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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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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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.
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.