Spread Betting the Schatz
If you’re interested in spread betting on bonds, then you should be looking at the Schatz and Buxl, two different bonds from the German futures market. The Buxl is a long-term bond, and the Schatz is a short-term bond. This means that the Schatz is less sensitive to changing interest rates than the Buxl. You may also see these two futures instruments referred to as the Euro-Schatz and the Euro-Buxl.
The Euro Schatz future contract is based on a two-year bond issued by the Federal Republic of Germany, and in its definition the actual period is 1.75 to 2.25 years. The notional interest rate associated with this bond is 6% per year. You can compare this with the Buxl, which is based on a bond with a remaining term of 24 to 35 years, and a notional interest rate of 4%. So, while both these financial instruments are based on the same fundamentals and from Germany, their performance will be very different.
It is sometimes hard to understand why a bond, which has a face value which is returned at the completion of the period, can vary so much in cost while it is still open. The answer is that the value of the bond depends on supply and demand, which in turn depends on what interest rate can be found on the open market in similar no-risk investments.
For instance, investors are prepared to pay a premium for a bond which promises them a higher return than they can find elsewhere. This is why the Schatz, nominally a two-year bond and therefore due for redemption shortly, is currently quoted at 11,033.0 – 11,034.5. In theory, in two years it would be worth 10,000 having made two further interest payments at 6%. Ignoring compounding for simplicity, that is 10,000+600+600, which is 11,200. The Schatz is nearly at that price level, mainly because interest rates are so low that there is little to be gained from investing elsewhere.
This is an oversimplification, and the Schatz future on which the spread bet is based is a theoretical financial instrument, and will not really mature in two years, but it illustrates the principle behind the differential pricing in the bond market. Of course, the opposite applies, and if the generally available interest rate was greater than 6%, as it has been at some times in the past, the Schatz value could fall below 10,000. It is unlikely this will happen again in the near future.
However, inevitably investors and traders are going to compare the interest rate that they can obtain on safe deposits with the notional interest rate of the Schatz, and use this in determining their view of the value. If general interest rates rise, you can expect the Schatz to fall, and if interest rates fall lower still, then the Schatz could increase a little, although it is almost at the limit of its value at the moment.
If you want to spread trade on the Schatz, then you can either choose to watch the interest rate market and derive your trades from that, or apply technical analysis directly to the Schatz chart, which is more likely to give you sound results as it reflects traders attitudes to this financial instrument.
Spread Betting on the Schatz
The Schatz is a short-term bond issued by the German authorities, and as such reflects the interest rates available on the open market. With everything else being equal, if interest rates go up the Schatz will fall in value, and vice versa. The current quote for the Schatz is 11,033.0 – 11,034.5. If you think that the Schatz will fall, then you can place a short bet at 11,033.0, staking, say, £6 per point.
If you are correct, you might close your bet when the price has fallen to 10,782.1 – 10,783.6. Here are the mechanics of how you work out how much you have won: –
- Your short spreadbet was placed at 11,033.0
- Your spreadbet was closed at 10,783.6
- The difference between these is 11,033.0 less 10,783.6
- This works out to 249.4 points
- As you bet for the price to go down, this is the amount of points you have won.
- Your stake was £6 per point
- Therefore you have won 249.4x£6
- Your total profit is £1496.40
If the price had gone the other way, you might be faced with having to close the bet and minimize your losses. Say the price had risen to 11,051.2 – 11,052.7. To work out your losses: –
- Your short spreadbet was placed at 11,033.0
- Your spread betting position was closed at 11,052.7
- The difference between these is 11,052.7 minus 11,033.0
- This works out to 19.7 points
- As you bet for the price to go down, these points count against you.
- Your stake was £6 per point
- Therefore you have lost 19.7x£6
- Your total loss was £118.20
When you are betting on the Schatz, you should bear in mind the basis of the number. It represents the value of a two-year bond which pays out 6% a year. This means that there is a limit to how high the number can go, as no one is going to buy the Schatz if it costs more than the maximum that they can get back. In practice it sells for less than this value, because investors could put their money elsewhere and receive a return.
As the value is close to this now, reflecting the low interest rates available elsewhere, a long bet on the Schatz does not have much potential for profit. It is much more difficult to work out how much long-term bonds, such as the Buxl represents, are going to be worth as this depends on the buyers of view of where interest rates are headed over the term of the bond. This and the fact that there are many more notional interest payouts each year with a long-term bond mean that the Schatz is subject to much less fluctuation than the Buxl, which despite being based on a 4% return per annum is currently selling for 27% over the face value. If you apply technical analysis techniques to the charts for either of these securities, then you will get an idea of where the market thinks they are headed and be able to make an informed decision with your spread bet.
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