CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.5% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Bond CFDsPepperstone

Trading bond CFDs with Pepperstone

Chris Weston
Head of Research
Mar 5, 2024
Bond CFDs provide traders with a chance to trade one of the cleanest expressions of economic trends, the potential for changes in a central bank’s monetary policy setting, as well as a government’s fiscal policy (though the impact of bond issuance to fund a deficit).

Fundamentals aside, bond CFDs also provide traders with a compelling trading environment through which to deploy their trading strategy, with highly liquid top-of-book pricing, low gapping risk (US bonds trade almost 24 hours a day), good movement and low drag from trading costs. 

Like many of Pepperstone’s spread-based markets, Pepperstone’s bond CFD offering will be priced off the front-month bond futures. Our LP then adjusts the price to remove the net financing cost (or cost of carry) from the current period to the futures expiration to create a cash price.

This typically means our cash bond CFD price will be lower than the futures price, where the difference is called ‘the Basis’ or ‘fair value’. 

As each day passes and gets closer to the futures expiration, the lower the basis – subsequently, we see the cash and futures converge over time.

If a client subsequently holds a cash CFD bond position over the rollover time they will pay/receive the swap charge depending on whether they are long or short. 

Background on bond futures

Underlying (real) cash bonds will have a capital component, where bond traders can buy and sell to speculate on price moves – however, market participants will also be positioning portfolios to receive income from the bond’s coupon (if long). 

Traders should make the distinction that bond CFDs are used by traders to trade price moves and there is no consideration for fixed interest or the coupon.

Given that Pepperstone bond CFDs price is derived from the futures pricing, it is worth understanding more about these markets. 

Traders use bond futures to speculate or hedge a physical bond exposure/portfolio. Pepperstone clients can use bond CFDs to hedge, but far more commonly bond CFDs are vehicles to trade price moves and to speculate and react. 

Bond futures will track closely to the same maturity (real) cash bonds. Predominantly because if the position is held past the future's expiration date this is what the seller will have to deliver if the buyer chooses to take delivery of the underlying. Once the buyers have the underlying cash bonds delivered, they will then get all the income from the bond's semi-annual coupon, plus any capital move from the changes in the price ongoing. 

The seller of the bond futures is obligated to give the buyer the underlying physical bonds after expiration.

Bond futures are settled with physical delivery and not cash settled like many futures products, which is why most futures trading brokers put an automatic roll instruction on client’s accounts.

Pepperstone’s bond CFDs work in a similar manner – whereby, close to the bond futures expiration date the LP will move to take the price from the next quarterly futures contract and provide a cash price from this. This should affect the cash bond CFD price given the fair value adjustment. 

Current bonds rolled out for clients to trade

  • US T-Bond (US Treasury with a 30yr maturity)
  • US T-Note 10yr (US Treasury with a 10yr maturity)
  • US T-Note 5yr (US Treasury with a 5yr maturity)
  • US T-Note 2yr (US Treasury with a 2yr maturity)
  • UK Gilt (UK bond with a 10yr maturity)
  • Euro Buxl Euro Bund (German bond with a longer maturity ranging between 24 and 35 years)
  • Euro Bund (German bond with a 10yr maturity)
  • Euro Bobl (German bond with a 5yr maturity)
  • Euro Schatz (Euro Bund (German bond with a 2yr maturity)
  • Euribor (Euro short-term interest rates)

Key factors for trading bond CFD with Pepperstone

  • While, in theory, bond CFDs should appeal to more experienced traders, for traders who solely focus on price action, patterns or technicals, bond CFDs offer some of the best trading environments of any market. They are highly liquid, offer reduced gapping risk, propensity to trend and we typically see compelling intraday movement and range.
  • The bond market is many times the size of the equity market and is an incredibly important part of the financial ecosystem. The influence bond pricing has on the FX and equity markets is clear - where often a move lower in the US bond price will lift the USD and could negatively impact the equity markets and vice versa. 
  • If you’ve cut your craft trading bonds, you’ll typically be a bond trader for life – you get the rhythm and feel of the flow and market and work your edge.
  • Unlike bond futures which have standardized contract sizes, bond CFDs are more flexible, and traders can choose their lot size to be in fitting with the account size and volatility at that time.
  • There is excellent liquidity in bond futures, perhaps the deepest in any of the futures markets and this is therefore the case with Pepperstone’s bond CFD offering – this facilitates a realistic and transparent price at which traders can hit the top of book with reduced concerns about getting slipped on price. 
  • Extensive trading hours – the cost to trade is always a core consideration, but the trading conditions are too, and traders want to mitigate gapping risk and have control to enter and exit when required, not on the open because it gaps up/down. Futures trading hours are as follows:
    - US bonds – 10:00 AEDT to 0900 AEST (23 hours a day)
    - EU bonds – 11:10 to 08:00 (21 hours a day)
    - UK 10yr gilt futures - 19:00 to 05:00 (10 hours a day)
  • Good movement across the various bonds – Traders can choose one instrument and trade as per their strategy, or they can be tactical with their choice of bonds. Bonds have a maturity date – 2-year or 10-year US bonds for example. Understand that the longer the maturity date of the bond (i.e. 2-year, 10-year, or 30-year) the more aggressive the intraday price swings will typically be. This is known in bond market circles as ‘duration’, where the longer the maturity the more sensitive a bond’s price is to changes in interest rates. 
  • Shorter-term maturities (such as USTN2YR – US 2yr Treasury) will still see good movement but we see that the typical daily percentage moves should be lower.
  • Short-term maturity bonds (such as the USTN2YR – US 2yr Treasury) are much more reflective of near-term Fed policy expectations. If a trader thinks US data will come in weaker than expected which will likely increase the prospect of a rate cut, then they would buy the bond CFD. 
  • Longer-dated maturities (such as the USTN10YR – US 10-year Treasury) include central bank expectations, but also other factors such as future growth and inflation expectations; a concept known in bond markets as ‘term premium’.
  • Bonds trade on price. This seems obvious but if you read any news article, they more often about is the bonds ‘yield’. A bond's price and yield have an inverse relationship, so if the price is rising then the yield on the bond is falling.

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