CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Between 54-87% of retail CFD accounts lose money. Based on 69 brokers who display this data. *Availability subject to regulation.
Treasury securities are debt obligations issued by central/federal governments to raise funds for financing fiscal deficits and public projects, as well as for funding their own operations. When a treasury security is purchased, essentially the owner is providing a loan directly to the government. In return, the government pays periodic interest and repays the principal amount on the maturity date. Treasury securities are considered to be one of the safest among all debt instruments as the government is generally expected to be able to meet its obligations.
Treasury securities are available in multiple varieties based on maturity periods, coupons and other features. In the UK, these securities are known as gilts and they are of following types:
Conventional Gilts: These are the simplest debt instruments issued by the UK government and they also contribute the largest share in total government borrowings. These bonds pay a fixed coupon amount semi-annually and the final coupon with the principal is paid at the end of the maturity period. Generally, the nominal value of these bonds is quoted at £100.
Index linked gilts: These gilts also offer semi-annual coupon payments, however the coupon payments and principal repayment are adjusted in accordance with the RPI (Retail Price Index), which is a proxy for inflation in the economy. The principal and coupon payments are adjusted to accommodate for the accrued inflation since the issuance of gilt. These gilts provide decent coverage against inflation as higher inflation leads to increased coupon payments. Index linked gilts issued post-September 2005 are linked to inflation figures published 3 months ago.
Double Dated Gilts (Rump Gilts): These gilts have a band of maturity dates and the government can choose to redeem them in full or in part on any of the dates in the band. These gilts are relatively older, small in quantity and not very liquid.
Gilt Strips: This is an arrangement in which the coupon payments and the principal repayment are stripped off the original gilt and traded separately in the market as zero coupon bonds. For example, a 5-year semi annual gilt can be stripped into 11 zero coupon bonds, 10 for semi annual coupons and 1 for principal repayment. These gilt strips are individually traded in the market.
Principal Preservation: Backed by the credit worthiness and full faith of the central government, treasury securities are extremely secure debt instruments. In sound economies, the chance of the central government defaulting on its payment obligation is quite rare. Although the risk of default is low for these securities, they do carry market risks.
Reliable income stream: Timely interest payments on coupon bearing treasury bonds ensure a reliable fixed income source.
Tax Benefits: Often the interest generated on treasury securities is exempted from local and central taxes which gives them an edge over the yields of taxable securities. This feature makes treasury securities very desirable in countries/states with high tax regimes.
Wide maturity range: These securities are available in wide range of maturities from few days to 30 years.
Liquidity: Treasury bonds are highly liquid in nature and can be easily bought and sold in the secondary market prior to maturity.
Treasury markets are one of the most dynamic capital markets in the world with multiple traders buying and selling securities worth billions on a daily basis. Treasuries are available for purchase in primary as well as secondary markets. The primary markets are where treasuries are issued for the first time through an auction process, organised mostly by the country’s central bank at regular intervals. Primary dealers (leading banks and brokerages) participate in this bidding process. Those wishing to purchase treasuries can direct their bids in the primary market through one of these primary dealers.
After these treasuries have been issued in primary markets, they can be bought and sold on the secondary markets through trading platforms provided by brokerage houses at the current market price.
Laddered portfolio strategy: In a laddered portfolio strategy, securities are purchased with maturities varying from short, medium to large, rather than purchasing treasuries with the same maturity. Such a strategy improves average the yield of the portfolio and provides periodic liquidity.
Government bond funds: These bond mutual funds run by professional managers who typically buy government treasuries issued from domestic as well as foreign governments. These are low-risk funds which are suitable for risk averse investors who want steady income and stability.
Speculative trading around treasuries through CFDs: Multiple brokers provide platforms for CFD trading on government securities. CFDs in treasuries allow traders to speculate on the price movement of popular treasury bonds. With CFDs, traders can magnify their exposure to relatively small price movements because of the margins at play. Popular regulated brokers such as Avatrade, City Index, IG and others provide platforms for CFD trading on well-known treasuries issued by governments across the world.
Interest rate risks: The market price of treasuries is inversely correlated with prevalent interest rates and they can go down if interest rates tend to increase.
Re-investment risk: This risk is associated with the possibility of the regular cash flows obtained from treasuries being at lower interest rates than the original treasury itself. This risk is more evident during periods of falling interest rates.
Credit Risk: This is the risk of the government defaulting on its commitment to pay back. Generally the quantum of this risk is very low for sound economies.
Treasuries are essentially bonds issued by the central/federal government to finance deficits and spending. They are low-risk debt instruments, which are highly liquid and available in a range of maturities. They provide a safe haven for traders with a low-risk appetite and the need for a stable and regular income source. These bonds also play a critical role in portfolio design by balancing out the risk of investing in equities.