How to Spread Bet UK Long Gilts
UK Long Gilts is the name given to bonds issued by the British government to raise money. A particularly large recent issue was to raise funds for “quantitative easing” to deal with the economic crisis. The name “Gilts” in general refers to British bonds, at least if it is not qualified in any other way, although Ireland and the Commonwealth governments sometimes have the same term. It comes from the fact that the certificates issued used to have gilded edges.
When you buy a bond, the government promises to pay you back your money in a certain number of years, and the date and interest rate is usually in the name of the bond, such as 5% Treasury Gilt 2055. You get your capital back in that year, and in the meantime you are entitled to interest payments twice a year, in this case 5% split into two payments of 2 1/2% each. “Long gilts” simply means there is a long period of time before they come due, usually 15 or more years.
As you’re going to get your money back in the end, many people wonder how the price of bonds can vary enough to be traded on. It varies because the prevailing interest rate changes from year to year – usually bonds are issued in line with the current interest rate. Now imagine that next year interest rates rise. Do you think you could sell this year’s bonds at their face value? No, because buyers would buy the new bonds which promise a higher payment twice a year. Therefore the price of this year’s bonds must go down, so that buyers would see a better return for the amount of money they invest.
The opposite also applies; if interest rates go down then today’s bonds will go up in value. If you are a mathematician or economist, then you can do some detailed calculations to find out just what is a “fair value”, but for our purposes all you need to realize is that bond prices go in the opposite direction to interest rates.
This reduces spread betting on UK Long Gilts to a bet on interest rates, in effect. If you think interest rates are going down, then you would place a buy bet, hoping to profit from an increase in Gilt values; if interest rates are rising, you can expect UK Long Gilts to fall in value.
As always in trading, the market comes to expect certain outcomes, so you will find that the prices vary in anticipation, even if the interest rate remains the same. This is where technical analysis can help you determine the sympathy of the market participants, and provide some measure for you to base your spread trading on. The “Long Gilt” is generally worth more than the “Short Gilt” for the obvious reason that there are more interest payments to be made before the capital is returned, but the value depends on the market’s long-term outlook.
UK Long Gilts Spread Betting
UK Long Gilts are British government bonds, and are related to the prevailing interest rates in an inverse way – if interest rates are going down, then the value of UK Long Gilts should go up. The current spread for UK Long Gilts is 11,546 – 11,550. You might want to place a long or buy bet for £6.50 per point if you think the price is going up.
Suppose that the spread quote goes up to 11,922 – 11,926. If you close your bet at this level, here is how you work out how much you won.
- Your bet was placed at 11,550
- Your bet closed at 11,922
- The difference in points is 11,922-11,550
- That is 372 points
- Your stake is £6.50 per point
- The amount you win is 372 times £6.50
- So the total you win is £2418
Some of the time your bet will be in the wrong direction, and when this happens you need to close your bet as soon as you realize it is not going to work. Say the quote for UK Long Gilts went down to 11,472 – 11,476, and you decided to cut your losses.
- Your bet was placed at 11,550
- Your bet closed at 11,472
- The difference in points is 11,550-11,472
- That amounts to 78 points
- Your stake is £6.50 per point
- The total you lost is £507
As another example, the interest rate is already pretty low, and you may decide from your research that it is going up – this would mean that the UK Long Gilt price would come down, which means you want to place a sell or short bet. You bet £9 per point when the spread price is 11,546 – 11,550.
If you are right, and the spread price goes down to 11,242 – 11,246, then you can close your bet and cash in. Here’s how much you won: –
- Your bet was placed at 11,546 (as it was a short bet)
- Your bet closes at 11,246
- Therefore the difference in points is 300
- Your stake is £9 per point
- Multiply 300 times £9
- Your total profit is £2700
Once again, you must consider the case when your bet does not win, and you need to “bite the bullet” and close the bet before the potential loss is too high. This is one of the hardest things to do when trading, as you never want to think that you made a wrong call, but it is necessary so that you make a profit overall.
Say the price rose up to 11,613 – 11,617, and this was high enough that you decided you needed to cut your losses and close the bet. You can work out how much you lost like this: –
- Your bet was placed at 11,546, as before
- Your bet closed at 11,617
- So you lost 11,617-11,546, which is 71 points
- For the same stake of £9 per point, your total losses are £639.
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