CMC Markets Treasuries

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Short Term Interest Rates (STIRs) allow you to trade on the direction of a country’s 3 month interest rates. The prices for all STIRs are calculated by taking the market's expected level for the 3 month rate and subtracting them from 100. For example, if Short Sterling is trading in the market at 96.50 this means that the market is expecting the 3 month rate to be around 3.50% (100.00 - 96.50).

The reason STIRs are priced like this is due to their correlation with Bonds, so when central banks are expected to raise interest rates, Bonds and STIRs should fall in price. Therefore, if you buy or go long a STIR, you believe that interest rates are going to fall. Conversely, if you short a STIR you believe interest rates will rise.

Government Bonds are issued by national governments. They generally promise to pay a certain amount (par value) at a given maturity, as well as periodic coupon payments. An Investor loans the par value of the Bond to a country across a pre-defined period of time for a certain interest rate. Because Government Bonds are backed by the full faith and credit of a national government, its assets and power of taxation, they are generally considered to have the lowest risk of any debt.

Government Bonds allow you to trade on the direction of long-term interest rates in various countries. For instance a US Treasury Bond, or T-Bond, allows you to take a view on long-term interest rates in the US.

Treasuries Pricing and Trading

CMC Markets have re-invented Treasuries trading by being the first to offer a purely cash price. Traditionally, Treasuries are traded via futures contracts which have expiry dates, rollover costs and price jumps at expiry. With CMC Markets cash treasury CFD prices, we strip out the carrying costs that are built into futures prices. When we do this, the price becomes smoother and more continuous, avoiding the price disparities (price jumps) seen when a futures contract expires and is replaced by the next contract. The carrying costs are applied to the position as a financing adjustment providing total transparency on the cost of holding the position.

For those that trade using technical analysis we have built in up to 2 years' worth of price history into our charts for Treasuries. Traditionally, when trading futures contracts you can only view price history for the period of the futures contracts. As our cash price has no expiry, we can show a smooth continuous price within our charts for an extended period.

Treasuries - Background and Influencing Factors

The primary driver of treasury prices is interest rates which influence the yield to maturity on the treasury. There is an inverse relationship between treasury prices and interest rates. When interest rates go down, treasury prices go up and when interest rates go up, treasury prices go down.

Bonds with different characteristics will exhibit different price reactions to interest rate movements. Modified Duration is a useful measurement of how sensitive a Bond is to interest rate changes; the higher the duration, the higher the sensitivity.

When Bonds are issued and when they mature normally, they are priced at 100.00. Bonds bought at a premium if held to maturity would have a capital loss while Bonds purchased at a discount would end up with a capital gain. Therefore, Treasuries are influenced by the yield to maturity which is a combination of the coupon income and the projected capital gain or loss if the Bond were to be held to maturity. At any given time, the current market interest rate and the yield to maturity should be equal.

Bond investors are aided in their analysis of the default risk by independent Bond rating agencies: Moody’s, Standard & Poor’s and Fitch. Rating agencies rate debt in a fairly similar way. An important ratings break point for companies is a rating of investment grade, which is a rating of BAA3/BBB- or higher. A rating below BAA3/BBB- would constitute non-investment grade, commonly referred to as high yield, or junk. Risk in AAA rated government Bond is primarily interest rate risk.

To trade Treasuries with CMC Markets please sign up for either a live or demo account, or, should you already have an account choose “Treasuries” from the Product Library when logged in to your trading platform.