How do interest rates influence bond markets?

The prevailing interest rates at the time of investment are a key driver of bond prices and yields. Keep in mind that bond issuers are always competing with the yields offered in the broader economy.

This dynamic becomes more complicated when interest rates change. Say you invested in a bond that yields 2%, but halfway to its maturity the interest rate offered by the banking system rose from 1.5% to 2%.

The issuer of the bond you purchased must now compete with the interest rate offered by the banking sector and so will issue new bonds with a higher yield. This puts the holders of the first 2% yielding bond at a disadvantage as they effectively paid the same for less yield. The only way to redress this imbalance, since the coupon is fixed, is for that first bond to drop in price until its price to yield is the same as the newer, higher-yielding bond.

The same occurs in the case of interest rates falling over time. If wider interest rates fall, then newer bonds will be issued with a lower interest rate. Since coupons are fixed, the older bonds issued at the higher interest rate will have their price go up in order for the coupon payment on the older, higher-yielding bond to match the lower yield of the newer bonds.

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What’s the relationship between bond yields and bond prices?

Bond yields and bond prices are inversely correlated. When the yield goes down, the price goes up. On the other hand, when the price goes down, the yield goes up. This may seem confusing at first glance, but it starts to make a lot more sense when you consider the supply and demand characteristics of bond investing.

Investors flock to bonds in uncertain times. This is because they tend to offer a higher yield than holding cash, and if the issuer has a high credit rating, they can be considered almost as safe as being in cash. But when there’s more demand than supply (i.e. everybody wants to invest in bonds), then the yield drops because the issuer has no trouble raising cash in such circumstances.

Conversely, when nobody wants to invest in bonds, perhaps because other areas of the market such as stocks are performing well and so look much more attractive, then the only way to attract capital to the bond market is to raise the yield to a level that becomes attractive to investors.

This is why, when bond yields are rising, the bond market is thought to be in trouble, and when bond yields are falling, the bond market is thought to be in good health. Of course, this can be taken to extremes.

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What are bonds and what role do they play in a portfolio?

Bonds are a type of debt-based security that’s issued by a government or a company, in order to finance its operations. In other words, a bond is a loan made by the investor, to the organisation issuing it.

This bond entitles the investor to an interest rate payment, known as a coupon, throughout the duration of the bond, as well as the ability to sell the bond on the open market to others whenever the investor in question chooses to do so. At the end of the term, also known as the bond’s maturity, the issuer of the bond must pay back the initial amount. Please note that when trading in CFDs, no coupon or interest payment is entitled to the investor.

The benefit of holding bonds in a portfolio is that they are considered much safer than stocks, but unlike holding cash, they benefit from the yield of the coupon payment. Longer-term bonds tend to have a higher coupon because of the opportunity cost of having your capital locked up, but, as we’ve seen above, this is also true when the issuer has a lower credit rating (i.e. it’s a riskier investment).

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What’s the difference between Brent Crude and Light Crude?

The global markets require that the commodities they list are standardized so that any unit can be interchangeable and of equal quality with any other.

In the case of crude oil, the sulphur, wax, and metal content of a type of crude oil can vary greatly from another. This can make it harder and costlier to refine certain crude oils into the petrol used to power consumer vehicles.

A region’s crude oil can be measured for quality and compared to that of a different region, and over the years, different benchmark grades have developed.

  • The most popular of these grades is West Texas Intermediate crude oil, which is also known as “light sweet crude,” meaning that it is less dense, less viscous, and lower in sulphur and heavy metal contaminants than “heavy crudes.”
  • The second most popular premium-grade crude oil is Brent Crude, which is considered a light crude despite being slightly heavier than WTI.

WTI (LCRUDE) is extracted from the North American Permian basin, whereas Brent crude is extracted from over a dozen wells in the North Sea of England. These offshore wells are harder and costlier to mine, which causes Brent crude to trade at a slight premium as compared to WTI.

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What commodities does ActivTrades offer?

ActivTrades clients can take advantage of a wide variety of market scenarios and outcomes.

ActivTrades currently offers CFDs on five types of spot commodities, but also 14 highly tradable commodity futures that allow you to express a commodity view, both long and short, in a much more targeted and sophisticated way.

ActivTrades Hard Commodity Markets:

Brent crude futures, brent crude (spot), copper futures, gold (spot), platinum (spot), silver (spot), diesel futures, gasoline futures, light Crude futures (WTI), Light Crude (WTI spot), and natural gas futures.

ActivTrades Soft Commodity Markets:

Cocoa futures, coffee futures, cotton futures, orange juice futures, corn futures, soybean futures, sugar futures, and wheat futures.

As you can see, ActivTrades customers enjoy the ability to be far more surgical in their commodities positioning, due to the larger number of tradable assets. This has stood our traders in good stead throughout the pandemic and beyond as there have been many opportunities on both the long and short side in commodity markets due to the supply chain disruptions that the global economy has had to endure.

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Why trade commodities?

Commodity markets are crucial to the global economy because they determine the price of all the raw materials that go into the manufacturing of finished goods, but also their refining and distribution.

Thanks to the US dollar’s reserve currency status, commodities are priced in US dollars on the global markets, this means that a strong dollar makes commodities cheaper, and a weak dollar makes commodities more expensive. Perhaps central to all the commodity complexes is energy.

Today, gold is traded as a safe haven, investors flock to it at times when confidence is low in the prospects of the global economy, as well as when inflationary fears surface. The fact that the US dollar is also used as a safe haven, sometimes complicates this relationship, so it’s often useful to chart gold against currencies other than the US dollar when wanting to find out how it has truly performed.

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What’s the difference between an ETF and a Mutual Fund?

ETFs are generally regarded as being far more transparent than mutual funds on a number of fronts. The precise mix of securities held by an ETF is published every single day, so as an investor you can know exactly what you are holding. Mutual funds, on the other hand, only publish their holdings once per quarter, which means that you can never really be sure of the exact asset mix you’re investing because by the time it is published, it can already be out of date.

ETFs are also more transparent in terms of costs, due to the fact that all the costs of trading are present in the spread, plus the commissions paid by the trader. This means that the activities of any one investor do not affect the rest. The same cannot be said of mutual funds, where the trading costs related to inflows and outflows are borne by all the individual investors of the fund in question. The exchange-traded nature of an ETF means that its fee structure is far more transparent to investors than that of a mutual fund, which is not traded over an exchange.

Finally, ETFs are also thought to be more liquid than mutual funds since they are traded over an exchange. This means that an ETF can be bought and sold all day long, whereas, in the case of mutual funds, you are purchasing directly from the issuer, not the market itself, at the relevant price at the day’s end.

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What are the benefits of trading an ETF?

One of the most obvious benefits is that ETFs are probably the most cost-effective way to expose your account to all those underlying securities held by the ETF in question.

Another benefit is the diversification offered by ETF investing. Rather than having your account exposed to the fortunes of a handful of securities that you’re trading individually, an ETF allows you to passively allocate capital to a large number at once.

Furthermore, when trading an ETF (or indeed an index), you only have a single trade to manage.

In addition, ETFs also distribute the dividends of the underlying securities held in the ETF portfolio proportionally to its investors, and there may also be some tax advantages to trading an ETF depending on your jurisdiction.

Finally, ETF investing is much more suited to beginners, due to the inherent diversification of the product.

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What are ETFs and how do they work?

An ETF, or exchange traded fund, is a type of investment fund that’s traded over an exchange, like an ordinary stock. These funds work by having an investment thesis of their own (e.g. green energy, or disruptive technology) which they use as a guide to purchase assets that fit into that specific thesis.

An ETF can hold all manner of assets in its portfolio including stocks, bonds, currencies, commodities, crypto, and more. In this way, when you purchase the ETF, your capital is proportionally exposed to all the underlying assets that the ETF owns.

The ETF itself tries to maintain its valuation at a level that’s comparable to the net asset value of all the assets it holds, however, depending on the sector, it’s not unheard of to have ETFs trade at a premium when compared to the assets held. 

The real value of ETFs is that they allow investors to allocate capital to specific “themes” without having to trade the underlying assets they hold. ESG (Environmental, Social, and Governance) ETFs are an example of an investment that follows a specific philosophy. The same goes for crypto or emerging market ETFs.

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Everyone in crypto talks about decentralisation, should I care?

Rather than thinking of decentralisation as being against centralisation, or bitcoin and crypto being against our global institutions, it may be helpful to think of them as a counterbalance.

All crypto is, when you look at it dispassionately, is an attempt to prevent power from finding its way into fewer and fewer hands, often in the form of unaccountable (and unelected) organisations that have come to hold an incredible amount of power and influence.

The network is entirely permissionless. Anybody can participate, either as a miner, or as an account holder, without needing to ask, undergo a credit check, or even reveal their identity. The complex sets of rules that govern how bitcoins are mined and distributed ensure that it’s incredibly costly to cheat the system because the cost of cheating is far greater than the cost of playing fair.

The point of a permissionless network is that in a world where you can have your accounts frozen, nobody can prevent you from accessing them. On a global scale, this means that bitcoin can fill the role of a truly global asset, that no single country can control.

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