Learn
Bonds are debt instruments issued by governments, corporations, and other entities to raise capital. They trade over the counter (OTC), and they are one of the most important asset classes globally. When you buy a bond, you’re lending money to the issuer in exchange for regular interest payments and the return of the principal amount at maturity. Most retail bond trading takes place in the secondary market, where issued bonds are resold, rather than the primary market, where new bonds are issued. Bonds and the bond market are sometimes neglected by traders, but a little time spent understanding this market can help you become a more well-rounded trader and improve your chances in one more financial marketplace.
The bond market has enormous significance to the real economy. With over $100 trillion in outstanding debt globally, government bonds come in many different types. These range from government treasury bonds to corporate high-yield securities. Bond CFD traders can access the market using contracts for difference, allowing them to speculate on the price movement of different bonds without taking ownership of the underlying asset.
Institutional investors are the biggest players in the fixed-income market, but retail traders can participate in many ways, like bond CFDs, ETFs, and mutual funds. But before you get involved in debt markets, you need to understand the basics.
A bond is a type of debt security where an investor lends money to an issuer, who may be a government or corporate entity, in return for interest payments called ‘coupons’, and the return of their capital at maturity. Bonds are used by traders and investors to produce reliable returns, and to hedge against equity market volatility.
To get active in the bond market you need to understand some basic terms. Bonds are quoted with several key metrics:
Bond prices and yields move inversely to each other. When bond prices rise, yields fall, and vice versa. This relationship is fundamental to understanding bond market dynamics. Interest rates also play a crucial role – when rates rise, existing bond prices typically fall, as newer bonds offer more attractive yields. Bond CFD traders need to understand how the price/yield relationship and interest rates can impact their debt portfolio.
Knowing how a market developed over time can tell you a lot about how it works now. The debt market has a long history, and throughout human history, laws around interest rates and lending have varied substantially.
The earliest financial securities recognisable as fixed bonds (rather than simple loans) date from 12th century Venice. These early bonds were obligatory, with wealthy citizens forced to borrow from the government, and perpetual: they never matured. Investors received a coupon but never had their capital returned. Surprisingly, the bonds became a popular way of generating an income stream, so a rudimentary secondary market appeared. Other states copied this measure when needed, but these early bonds were rarely issued, used in emergencies to cover the costs of wars or other sudden expenses.
The first government to systematically issue bonds to cover its expenses was the Dutch Republic in the 16th century. Britain followed shortly after, with the Bank of England highly active in this market. From around 1700, the market we know today gradually took shape, with increasing participation by companies as opposed to national governments. Many trading companies used bonds to fund expeditions abroad, expanding from the original issuer base of nation states.
Throughout the 19th and 20th centuries the market grew in scope and importance, with a major twentieth century innovation being the emergence of the Eurodollar market, where foreign-issued, USD-denominated bonds trade. Retail investors have grown in importance from the 1990s onwards. So far in the 21st century, bond trading has moved online, and the market has witnessed the emergence of new products, including bond ETFs.
Fixed-income trading is divided into two markets: primary and secondary. The primary market is where new bonds are issued, while the secondary market is where existing bonds are traded. Debt trading in the secondary market provides liquidity for investors and helps establish market prices, whereas primary bond issues offer the immediate capital required to fund business operations or state expenditure.
Bonds do not trade on an exchange, like stocks, and trading is not limited to specific hours. For large institutional traders, their bank will be able to facilitate trades at any time of day. The bond market relies on market makers offering continuous buying and selling for different fixed-income securities, and these companies will normally follow business hours of their home market. For liquid bonds such as T Bills, the market is effectively open 24 hours a day, but liquidity in some assets may be concentrated in office hours of their home market.
Governments and international groups like the World Bank are the largest issuers in the fixed income trading world, issuing trillions in sovereign debt annually. Major players include:
Their bonds typically offer the highest security and lowest yields, forming the foundation of many investment portfolios. What is the bond market’s largest segment? Government securities are dominant, with US Treasuries alone accounting for over $23 trillion in outstanding debt. These bonds are traded by everyone, with large portions held in reserve by other national governments, and it is mostly these bonds which make up bond ETFs.
Banks and investment firms issue, trade, and facilitate bonds. Financial institutions are responsible for almost all levels of the bond market, including:
How does the bond market work through these institutions? Financial institutions issue new bonds and are active in secondary markets. As brokers, market makers and intermediaries they create efficient price discovery, maintain market liquidity, and facilitate both retail and institutional trading.
Companies participate in debt trading both as issuers and investors. As issuers, they:
Corporate bond trading offers higher yields than government securities, reflecting their greater risk. Large corporations may have hundreds of different bonds outstanding, and corporates are also active in secondary markets, holding debt as a hedge and an easily convertible store of cash to beat returns. Short-dated government bonds are particularly popular with corporates for this purpose.
Individual investors are increasingly entering the bond market through various channels:
What is fixed income investing for retail traders today? Traditionally, bonds were used as a hedge for your stock portfolio. Today, the situation is a little more complex. The retail segment has grown significantly with online platforms making bond trading more accessible than ever. Modern technology allows retail traders to access markets previously reserved for institutional investors, though they typically trade through intermediaries rather than directly in the institutional debt market.
Trading bonds with ADSS allows you to share in the price move of an underlying bond, such as US T Bills, or UK Gilts. They do not pay coupons, and do not give ownership of the underlying asset. CFD traders are active in bond markets to take leveraged positions on price moves, or to act as an uncorrelated hedge for positions in other markets. In general, government bonds are uncorrelated with stock returns, and major government bonds act as safe haven assets along the lines of the US dollar or Swiss franc.
Bond market fundamental analysis and fixed income trading involves making an evaluation of economic, policy, and market factors that drive bond prices and yields. Bond CFD traders analyse economic indicators like GDP growth, inflation rates, and employment data to gauge economic health and potential interest rate movements. Ratings agencies describe the creditworthiness of different bonds, and you can find a more detailed explanation of bond types and ratings on the ADSS educational site.
Technical analysis, contrary to what you might expect, can be quite effective in bond trading, particularly in liquid markets like US Treasuries. Traders regularly use chart patterns, trend lines, and technical indicators to identify potential entry and exit points. Common technical tools include moving averages, RSI (Relative Strength Index), and MACD (Moving Average Convergence Divergence), which can help traders spot overbought or oversold conditions and trend changes.
The yield curve plots the prices of a range of bonds with the same issuer and credit rating, but different maturity dates. It can be used as a subject of technical analysis, with traders studying patterns in curve steepening or flattening, spread relationships, and break-even levels. These technical approaches work best in combination with fundamental analysis – for instance, using technical signals to time entries into positions that align with fundamental views. However, it’s important to note that technical analysis becomes less reliable in less liquid segments of the bond market, such as certain corporate bonds or emerging market debt.
When trading bond CFDs or other fixed-income instruments, understanding liquidity is very important. More liquid bonds, such as major government issues, typically have tighter spreads and are easier to trade. Less liquid corporate bonds may offer higher potential returns but carry additional risks. The price action of bonds in the secondary market is limited unless they go into default and the bond loses its value entirely. With highly rated government debt this is extremely rare, but external shocks can cause volatility in both directions for fixed-income securities. To protect yourself, you should follow robust risk management principles based on diversification, position sizing, and trade discipline.
Bonds are a big part of financial markets. Debt instruments offer opportunities for traders to hedge and speculate while funding the operations of corporate and government issuers. Whether through direct bond trading, CFDs, or ETFs, fixed-income trading provides retail debt investors options for generating returns and hedging portfolios. Before you start trading bonds you should to learn how the bond market works, analysing fundamentals and applying technical analysis. As you develop your understanding of the fixed-income market, a demo trading account is an invaluable way to learn more about this important asset class.
What is bond trading and how does the fixed-income market work?
Bond trading involves buying and selling debt securities, where investors lend money to issuers in exchange for regular interest payments and return of principal. The fixed-income market operates through primary (new issues) and secondary (existing bonds) markets, with prices influenced by interest rates, economic conditions, and credit ratings.
How can retail traders participate in debt market trading?
Retail traders can access the bond market through multiple channels including bond CFDs, ETFs, mutual funds, and direct bond purchases. Online platforms have made fixed-income trading more accessible, though most retail participation occurs through intermediaries rather than direct institutional debt market access.
What factors should investors consider in bond trading?
Successful bond trading requires understanding key metrics like yield, coupon rates, and maturity dates. Traders should also consider market liquidity, risk management, and the relationship between bond prices and interest rates. Fundamental and technical analysis can be effective tools for trading decisions in the fixed-income market. In terms of location, bond trading in Dubai and other financial centres offer round-the-clock market making for bond traders. However, local bond markets often close for holidays, so confirm this before you place a trade.