What's on this page?
- Background to bonds
- How to buy bonds
- What are the best bonds ETFs to watch?
- What are the best government bonds to watch?
- Why buy bonds?
Background to bonds
Bonds are essentially an ‘I owe you’ that are issued by a country or company to raise capital. When you buy one, you’re loaning the issuer your money for a set period of time. In return, they make regular payments (called the ‘coupon’) to you, before giving you back your original investment once the bond reaches its expiry (‘matures’).
Bonds example
Suppose you invest £10,000 into a bond of a specified time period with a 5% annual coupon. The bond issuer would pay you 5% of £10,000 each year as interest before the maturity date. At the maturity date, the issuer would then give you back the £10,000.
Bonds come in two broad categories:
- Government bonds are issued by countries. These tend to be seen as very safe, especially when attached to a large economy such as Germany or the US
- Corporate bonds are issued by companies. These are usually riskier than government bonds – the level of risk depends on the issuer
Higher risk can lead to higher returns and greater losses, which makes it important to have a risk management strategy in place.
How to buy and trade bonds
- Do your research – we’ve outlined useful information in this guide
- Create an account or log in
- Choose whether to invest by share dealing or trade using spread bets and CFDs
- Pick a bond or bond ETF and take steps to manage your risk
- Open and monitor your position
Learn all you need to know about how to trade or invest in bonds
When you invest in bonds, you own the underlying asset. When you trade bonds, you aren’t directly buying them. Rather, you take a ‘buy’ position if you think the bond’s value will rise or a ‘sell’ position if you think it’ll fall.
Investing in bonds
By investing in bonds, you’re buying them outright and adding them to your portfolio. Doing this with the issuers themselves can be an expensive process, with minimum lots of £100,000 in many cases. To counter this, many individual investors will invest via a fund, such as a bond exchange traded fund (ETF).
Bond ETFs pay a regular dividend – in a similar way to a bond’s coupon – and move up or down in value as their underlying holdings move in price. But, because ETFs trade on exchanges, they’re much easier to buy and sell. So you get the benefits of bonds, plus added liquidity and transparency.
There are a wide number to choose from, ranging from groups of high-yield corporate bonds to individual UK gilts. There’s one key difference between bonds and bond ETFs to be aware of, however. While the former will mature and pay you your money back, ETF investments last indefinitely.
Open an account to start investing in bond ETFs
Trading bonds
When you trade bonds, you’re using derivatives such as spread bets or CFDs to speculate on their price movements without taking ownership of any underlying assets.
This means you can go long if you think bond prices will rise and short if you think they’ll fall. Say you believe that an upcoming interest rate hike from the Bank of England (BoE) is set to hurt gilts. You could open a short position on long-term gilts and profit if their price drops.
This makes trading bonds particularly useful for hedging. If you have holdings in your portfolio that might suffer from rising interest rates, you can short bonds to offset the risk.
Leveraged products like spread bets and CFDs also enable you to only put up a fraction (called the margin) of the total cost of the position initially. However, this can amplify your potential profits and possible losses.
To short £5000 worth of long-term gilts, for example, you only have to put down £1000 as initial margin, but any profits or losses will be calculated based on the full value. This means that your losses could easily outweigh your margin amount, so it’s vital that you manage your risk properly.
Learn more about how leverage impacts your trading
What are the best bonds ETFs to watch?
- Amundi UK Government Inflation-Linked Bond ETF (GILI)
- iShares USD Treasury Bond 20+yr ETF (IDTG)
- iShares USD High Yield Corporate Bond ETF (IHHG)
- iShares GBP Ultrashort Bond ETF (ERNS)
These five bond ETFs are available on our platform, and were chosen because of the high value of their holdings and for market news. However, keep in mind that the annual yield is subject to change depending on underlying market conditions, such as interest rates. Past performance is not a guide to future performance. Always do your own research.
Amundi UK Government Inflation-Linked Bond ETF (GILI)
The Amundi UK Government Inflation-Linked Bond ETF tracks the benchmark index FTSE Actuaries Govt Securities UK Index Linked TR All Stocks. This index provides exposure to sterling-denominated inflation-linked bonds issued by the UK government.
Because the UK has a relatively stable economy, this ETF is a relatively safe one to invest in. Dividends are paid twice annually, in July and December, though the bond is typically negative-yielding.
A negative-yielding bond occurs when the premium paid exceeds the income received at maturity. This isn’t necessarily a bad thing – an investor might buy a negative-yielding bond to diversify their portfolio. They could also sell the bond (or in this case, the bond ETF shares) at a capital gain if the yield continues to fall and the price increases.
Lyxor uses physical replication, meaning the ETF holds the underlying securities of the index its tracking. This leads to the ETF closely reflecting the benchmark index’s performance. It had £72.6 million worth of assets under its management as of 29 February 2024, almost all of which has an AA rating. And it also boasts a low expense fee of just 0.07%.
See the Amundi UK Government Inflation-Linked Bond ETF live market price
L&G ESG Emerging Markets Corporate Bond USD UCITS ETF (EMUG)
As the name suggests, L&G ESG Emerging Markets Corporate Bond USD ETF aims to provide exposure to US dollar-denominated corporate bonds in emerging markets, with holdings in countries like China, Mexico and Macau. Around 93.7% of its net assets are held in non-UK bonds.
It’s an open-end fund, meaning it doesn’t have a fixed number of shares in circulation, so there’s less chance of supply and demand impacting its price.
It was only launched in January 2021, which means some data is yet to be generated, such as reliable sustainability characteristics or yield figures. However, it has grown by a relative 8.37% over the past year. We included it in our list in any case because of its exposure to emerging markets and potential to perform well.
iShares GBP Ultrashort Bond ETF (ERNS)
The iShares GBP Ultrashort Bond ETF invests directly in corporate bonds across sectors, such as industrials, utilities and financial companies. It also invests in quasi-government bonds, which aren’t secured by collateral.
Unlike the bonds in our other chosen ETFs, those in this one are ultrashort – typically maturing in a year or less. Investors might consider an ETF of this kind if interest rates appear likely to rise in the future, providing the opportunity to make the most out of a decent yield over a short period of time. Indeed, rates rose sharply in 2023.
As of 24 April 2024, this ETF’s 12-month trailing distribution yield was 4.46%, with dividends paid twice annually. The fund has a rating of AA, which is the second-best ESG rating according to MSCI criteria. It has a slightly higher expense fee of 0.09%.
See the iShares GBP Ultrashort Bond ETF live market price
What are the best government bonds to watch?
In addition to investing in or trading on the prices of ETFs, you can use spread bets and CFDs to speculate on individual government bond markets. Here's an introduction to what you can trade with us.
Germany: the Bund, Bobl, Schatz and Buxl
Germany’s bonds are some of the most traded and watched in the world. The Bund is its long-term offering, the Bobl is medium term and the Schatz is short term. The Buxl, meanwhile, is its ultra-long-term bond.
US: treasury bonds and T-notes
US bonds with maturities over ten years are called treasury bonds (T-bone), while Treasury notes (T-notes) have maturities of ten years or less. With us, you can trade T-bonds plus 10-, 5- and 2- year T-notes.
UK: gilts
The BoE calls its short- and long-term bonds ‘gilts’, because the original certificates had gilded edges. Typically, government gilts are issued for five, ten, or 30 years, although the UK has issued undated gilts, too, which never reach maturity and pay coupons forever.
Italy and France: BTPs and OATs
Italian bonds are known as Buoni del Tesoro Poliennali (BTP) and were first issued in 2012. You can trade long-term BTPs with us. France calls its bonds Obligations assimilables du Trésor, or OATs. These are medium- and long-term bonds with maturities ranging from two to 50 years.
Why buy bonds?
Bonds can make good investments for two reasons:
- Diversification
- Interest rates
Diversification
Investors use government bonds to diversify their portfolios, as countries rarely default on their debts – although this can happen. For example, in 2020, Argentina, Ecuador and Lebanon defaulted, most notably due to the coronavirus pandemic, but this wasn’t the only factor.
When recessions or bear markets arise, individuals will often flee equities for ‘safe-haven’ assets, including bonds. This causes their prices to rise. If your portfolio already holds bonds in this instance, any equity losses you see may be partially offset by profits from your safer holdings. Plus, the relative stability of bond prices reduces overall volatility in a portfolio.
Interest rates
When newly issued bonds have lower interest rates, the price of existing bonds goes up because there's a greater demand for them. When interest rates on new bonds are higher, the value of existing bonds goes down because their demand drops.
While this means bonds are subject to interest rate risk, it also makes them useful for traders who want to hedge against interest rate movements.
Learn more about the relationship between bonds and interest rates
Buying bonds summed up
- When investing in bonds, you’re buying the assets outright – lending the issuer your money. In return, they pay you a coupon and return your capital when the bond matures
- Government bonds can yield steady, stable returns over time
- Investors use government bonds to diversify their portfolios and to hedge against interest rate movements
- When trading bonds, you don’t own the underlying asset but instead speculate on its price movements
- With us, you can trade on bond and bond ETF price movements with spread bets or CFDs, and invest in bond ETFs
Open an account to start buying and trading bonds
