When governments want to borrow money from the capital markets, they issue bonds, also called government debt. These are IOUs from the government to the market: the government promises to pay investors their full principal in addition to a rate of interest on the bond that is determined when it is auctioned (e.g. 5.5%).
Bonds come in all shapes and sizes, but in the world of spread betting and CFD trading, companies tend to quote prices on the biggest bond markets, like US Treasuries, UK Gilts, German government bonds, and Japanese government bonds (JGBs). The most popular maturities (the time between when the bond is issued and when it is redeemed – its effective lifetime) are the 10 year bonds. These are often referred to by analysts as the ‘benchmark bonds’, the bond whose price is most closely followed by the market.
German government bonds are called Euro Schatz (short term two year bonds), Euro Bobl (five year bonds), and Euro Bunds (bonds from nine years all the way out to 30). Some spread betting companies will quote prices on shorter term bonds from other countries, for instance two year and five year notes. Governments are in the habit of issuing short term debt because some of their costs are short term in nature too.
When trading bond markets as a customer of a spread betting or CFD trading company, remember that you are trading the price of the bond, you are not investing in the bond itself. Nobody will pay you the value of the bond when it reaches maturity, or any interest payments. As a CFD trader or spread bettor, you are focusing on the price only.
Prices of bonds will often rise when investors are nervous about equities (shares) or when governments are paying higher rates to raise money, and fall when investors become more interested in shares.
Bond traders focus on statistics like inflation, unemployment and budget statements to try to gauge the financial health of governments, and how much they are likely to borrow in the future. In effect, they are almost treating a country like a company. Tax rates and statements of economic growth (or shrinkage) can move bond markets quickly.
Using contracts for difference or spread bets to trade government bond markets, you can potentially make money if prices go up or down. You also have the benefit of using leverage (trading on margin) to make money on what are really tiny day to day movements in the price of government bonds.