Bonds are widely traded instruments in global markets, and they’re becoming even more popular with CFD traders who want interest-rate exposure or ways to diversify their portfolios. They also give you the ability to go long or short.
Not sure how to trade bonds? We’ll cover everything from “what are bonds?” to the main bond types. We will also explain how to trade bonds using CFDs and cover the main benefits and risks so you can approach the market with confidence on the CMC Markets platform.
What are the different types of bonds?
Government bonds
Issued by sovereigns (for example, UK Gilts, German Bund/Bobl and US Treasuries). They are widely followed, and you can expect them to be very liquid. With CMC Markets, you can trade CFDs on major government bond benchmarks.
Corporate bonds
Issued by companies to finance their operations or growth prospects. Credit quality ranges from investment grade to high yield. While single-name corporate bond CFDs aren’t standard, traders can gain exposure via ETF CFDs that track baskets of investment-grade or high-yield debt.
Municipal bonds
Regional or local authorities (more common in the US) issue these. Like corporates, exposure for CFD traders is achieved via ETF CFDs that reference diversified baskets.
High-yield bonds
Also called ‘sub-investment grade’, they tend to give you higher coupons to compensate for a higher risk of default. For CFD traders, high-yield exposure is gained through ETF CFDs rather than individual bonds.
How do bonds work in CFD trading?
With bond CFDs, you are speculating on price moves rather than collecting coupons. In other words, you can do one of two things:
Go long if you expect the bond price to rise (e.g. because you expect a fall in interest rates or a ‘flight to quality’).
Go short if you see prices falling (e.g. because you foresee rising rates or improving risk sentiment that pushes yields up).
Two main mechanics matter here:
Inverse relationship between price and yield: When market interest rates rise, existing bonds (with lower coupons) become far less attractive, so prices tend to fall (and vice versa).
Macro drivers: Inflation data, central-bank guidance, labour-market prints and growth indicators move bond prices intraday.
If you’re a trader wondering how bonds work in New Zealand, the principles are the same. Prices on global benchmarks (i.e. US Treasuries or Euro Bobl) reflect expectations for interest rates and growth. You can trade these international government bond CFDs from New Zealand with CMC Markets and use them to express a view on global rates or to balance your equity risk in a more diversified portfolio.
What are the benefits of trading bonds?
Generating income (in the underlying market): Experienced bondholders receive coupons for income. While CFDs don’t confer ownership or coupon payments, coupon expectations and yield changes still drive the price you trade.
Liquidity: Major benchmarks (think US T-Bond, UK Gilt) are among the most actively traded securities in the world, which can translate into tight pricing on the related CFDs.
Capital gains: If you believe there are favourable moves in rates or risk sentiment, you can trade the price up or down and potentially net some gains before maturity, all without owning the bond.
Lower volatility than equities (historically): Government bond prices generally move less than individual shares, so some traders use bond CFDs to offset any potential portfolio swings or diversify their equity-heavy positions.
How to trade bonds in New Zealand with CMC Markets
1. Open a trading account: Create your CFD account. If you’re new to CFDs, you can practise first with a demo account to build your confidence and take a look at order types on live-like prices.
2. Research bonds: Use our platforms’ charts, news and economic-calendar tools to follow central-bank decisions, inflation, growth and employment data. Make sure you dive into instrument details (minimum trade sizes, trading hours, etc.) and understand costs like spread and overnight holding.
3. Decide on your strategy: Are you positioning yourself for a medium-term rate move (buy-and-hold), hedging equity risk ahead of data, tactically shorting on a hawkish central-bank surprise, or something else entirely? Your approach will influence your trade size, holding period, risk controls, etc.
4. Place your trade: Search for your preferred bond CFD. Choose the order type (market or limit), set your quantity and add any risk-management setups (stop-loss, take-profit). Submit the order and monitor fills and P/L.
5. Review and manage: Track positions around macro events. Adjust your stops as the trade changes over time and be mindful of overnight holding costs on leveraged positions.
Key strategies for trading bonds
Shorting
If you expect rates to rise (e.g. a hotter-than-expected CPI), you might short a bond CFD. Rising yields mean falling prices, so a short position should seek to benefit from that decline.
Buy-and-hold (directional long)
Traders who think yields will fall (maybe because of slowing growth or dovish policy) might go long on certain CFDs and hold through major policy meetings. Stops and take-profits help manage these risks around volatile data releases.
Hedging
Some traders use government bond CFDs to help offset their equity exposure. If risk assets sell off and yields drop, bond prices can rise (and partially counter equity drawdowns). Hedging outcomes are not guaranteed here, but bonds can play a role in broader risk management.
Risks and considerations when trading bonds
Inflation risk: Rising inflation cuts into the real value of fixed coupons and tends to push yields higher and prices lower. For CFD traders, that can mean faster moves around CPI releases and inflation expectations.
Market volatility: Bond prices react to interest-rate decisions, macro surprises, political developments, liquidity conditions, and so much more. The result? Unpredictable movements, particularly around central-bank meetings and data prints.
Overnight holding costs: Holding leveraged CFD positions beyond the trading day can incur financing charges. Unexpected headlines out-of-hours may also gap markets, so use stops carefully and make sure you know product hours.
Bonds give CFD traders a liquid way to trade interest-rate expectations and diversify their equity risk without owning the underlying security. However, it’s not always easy understanding what are bonds and the main steps for how to trade bonds with the right risk controls in place.
CMC Markets provides access to bond CFDs along with educational resources, research, and platform tools to help traders learn more about how these markets work. Ready to put theory into practice on an intuitive platform with robust tools, research and education?
Start trading bonds today with CMC Markets New Zealand.
