How Bond Futures Trading Works

As all futures trading, bond futures trading involves the sale and purchase of legally binding contracts that obligate one to buy or sell specific bonds at predetermined prices on a given date. While the details are all spelled out in the contracts, there is always one variable that enables investors to make incredible profits in these ventures. The price of a bond at the time of a futures contract purchase is not necessarily the price of the bond during the interval between buying the future and actually buying the bond. If the bond’s value increases before the date of the contract arrives, the investor can try to sell the bond future and keep the difference in prices as profit.

The Advantages of Bond Futures Trading

There is risk involved in bond futures trading. The investor cannot be certain of an increase in bond prices and must rely on his or her own knowledge of the market to predict how bonds will perform in the future. It is possible that the bonds will lose value and the investor will have a hard time exchanging the bond futures without taking a loss. However, the possibility for a quick return in the short term keeps the bond futures trading market quite active.

The first advantage of bond futures trading is the way that a large amount of bonds can be leveraged for just a fraction of their total price. This makes it possible for even small investors to participate in this risky but lucrative form of trading. In addition, investors can choose from the available types of bonds for their futures contracts. The 30-year Treasury bond and both the ten-year and five-year treasury notes are subject to investment as bond futures. These options in bond futures trading allay concerns about the risks involved.