Trade bonds directly (not using an ETF)

Hi everyone,
I was starting to read a bit about bonds and I was noticing that not many brokers actually offer them and who does is quite pricey especially if you are a small investor.
I was wondering then if could be considered the possibility of trading bonds?
Since I know even less about their trading then the stocks I was wondering if is it something complex to implement and on which platform are they actually traded?

Of course this is a consideration for the future and only if enough people are actually interested in this type of security.

Keep up the good work!

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You can actually buy UK state bonds (with effectively next to no risk attached to it), as well as corporate bonds (as an index rather than individual companies’ bonds).

Check them out here

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Excellent question @Elettric!

I think Freetrade’s bond offering is via ETFs, rather than say holding the actual corporate bond or gilt (UK government issued debt, so called because when bonds were originally issued, the note had a gilt edge) @vlad so keen to hear what the Freetrade view is on offering bonds in the future.

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At launch we won’t be offering bonds, but will be offering ETFs that track the performance of bonds, so you will be able to get exposure to that asset class.

Regarding complexity, yes, to an extent trading bonds is more complex as they are not exchange traded, and therefore buying and selling has to be agreed through another platform (historically voice broking in most cases). It’s therefore more expensive and operationally complex to trade bonds than exchange traded assets (although this is slowly changing).

Providing access to the bond market (rather than exposure through ETFs) is something we’ve considered, but we don’t see it as a priority at the moment as we think the ETFs offer a more accessible way to get exposure to the asset class. So for now we’d rather focus on increasing your options to trade on different exchanges around the world, but if we see a lot of demand among our community that could change!

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Thank you everyone for the reply!
I was aware that will be available from launch ETF tracking bonds but my main curiosity was about how to trade the bonds themselves. I gave a look how to buy gilds and the process looked relatively complex and time consuming. So if there was the possibility to buy them with only few clicks at a reasonable price it would have been great.
@Rob thanks for the explanation, I totally agree that the expansion of exchanges is way more important, actually I’m so looking forward to that!!!
Besides now the yield on bonds if not super riscky aren’t all that great, but in the future having the possibility to trade them is interesting to me.

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Nice to know why they are called gilts though! :sweat_smile:
But is it not what $IGLT does? Line 8 of the universe.

Yes and no, from my understanding. It is a portfolio of different issues of gilts, 44 holding if I understood correctly.
For more information you can check here:
https://www.ishares.com/uk/individual/en/products/251806/ishares-uk-gilts-ucits-etf?switchLocale=y&siteEntryPassthrough=true

The top holding is this one:
https://www.londonstockexchange.com/exchange/prices-and-markets/retail-bonds/company-summary/GB0004893086GBGBPUKGT.html

I agree that as convenience is probably the best choice but if are interested in a specific issue for instance a new one with a nice high yield, having all the low yield tagging along isn’t all that convenient.
As example in 1982 the us 30 year bond went up to 14%, ok the inflation was 13% or something like that, so in the moment was not so attractive with a net 1% but since the US economy is stable most of the time so was likely to have the inflation come back down, therefore on the long run you would have looked at a very attractive yield and you could actually sell it when money become cheap to borrow again and invest the return in something with even better prospects.

P.S. It is not all my analysis I heard it in an interview and again on a podcast regarding switching between bonds and stocks and make the most out of it. If I happen to remember where I heard it I will place the link.
Anyway personally for the moment if I decide to go on bonds I would use a ETF for simplicity, diversification etch. but is nice to have the possibility.

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Think there was space for more info here on bonds as an asset class and how we’ll handle them at Freetrade.

So we wrote a little something on bonds, with Bonds.

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Great article! Thanks!

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I’ve been working my way through the Introductory Wiki and found this excellent post.

I’ve gone off to to try and get my head around bonds (gilts in particular) and found VGOV. As an academic exercise I’m trying to understand it better and have some questions, if you don’t mind :slight_smile:

These are the “characteristics” from the webpage:

I’m confused about YTM and average coupon values. Am I right in saying that the YTM is (very approximately) the bond equivalent to an APR in a savings account? I understand from the blog that the coupon is the interest rate based on the original bond price. As I can’t see that, I’m not sure what this figure is telling me. Is that right?

Basically, any advice on how I interpret this? How would I assess expected income returns from an ETF like this?

Also, am I right in assuming that interest (is that the right word?) would be paid on a predefined schedule, a little like dividends? How does this work? How would I find the details?

This is probably all very basic to those in the know - thanks in advance for sharing the knowledge.

Hi,
I’m also quite new to investing so if I say something not correct please correct me.
As a start I share some article that I found helpful





The videos are mostly US oriented but I found them easy to understand and gave me at least a base and probably I should go back to listen to them again XD.

Ok back to your questions, Yes the YTM can be saw as the APR of a saving account and even if fairly complicated to calculate by yourself, the formula is in one of the link, it helps to determine the return of a bond compared to others independently from the duration.

The average coupon instead is the average of the returns in one year, for example if I have a 2% and a %5 I get an average of 3.5% but since at the moment the new bonds emitted have a coupon of 1% I will have to pay a premium to buy a bond that has a higher coupon, in this example 5% and 2%. Since I have to pay more the YTM will be lower than what I would otherwise get having bought the bond at the very beginning.
This is also true in reverse that if new bonds are released with 6% coupon I would be able to buy the 5 and 2% coupon at discount.

The coupon, called like this because when the bond were made of paper they come with removable slips called coupon to send by post to receive back your nice check, are in most cases paid twice a year.

About that particular ETF you can find much more info on their website
https://www.vanguard.co.uk/adviser/adv/detail/etf/overview?portId=9501&assetCode=BOND##overview
They pay a monthly dividend as found in the “key found facts”

As another fund to compare USD treasury bond again it pay mountly and YTM is 2.8% so about double what the gilds can offer. In this case the average coupon is 2.3% but since the latest release of treasury bond if I’m correct was 3% made all lower yielding bond previosly release go down in price therefore increasing the YTM. The average coupon I think is important because if you see the trend of the bond go upwards will make the fund lose value as you can see in the graph inside.
https://www.vanguard.co.uk/adviser/investments/product.html#/fundDetail/etf/portId=9662/assetCode=bond/?overview

I hope this help you and that I managed to be reasonably clear. Of course if anyone more expert has any correction to make please correct me so I will learn too something new. :wink:

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To follow the strategy of buying new long term gov bonds/gilts when they’re at a high rate, and selling them when new ones are a low rate, but via an ETF tracking the bond market, what stat should you be considering?

Do you wait until the current avg coupon is high, and completely ignore YTM?
Do you only consider YTM? Something else?

There is risk with government bonds, countries can default on debt…like Russia or Venezuela etc.

Another risk often disregarded or not presented as a risk at all is related to inflation, the impact of inflation on the future value of the principal: when inflation is higher than the bond/gilt yeld the purchasing power of the principal diminishes. Unless one is investing in bonds protected against inflation of course

Are you referring to roll down gains from holding a bond, in which case you would want to be at the steepest part of the yield curve? However yield curves are pretty flat at the moment anyway.

Yes. Let’s assume with buying newly issued bonds directly you’d only buy when the coupon rate is better than your estimate of what you can get from the stock market (1/PE), and you anticipate a market correction that will eventually make bond coupon rates go lower.

I just don’t know how to translate that strategy to buying ETFs that track gov. bonds.

Similar to passive index trackers for shares, holding a bonds ETF tracker is not an effective way of implementing a bond trading strategy.

In that case, I vote for this topic. Why has no one else voted? Perhaps because the title doesn’t make sense? Since the OP said “if could be considered the possibility of trading bonds?”, @alex.s can the title of this idea be changed to “Trade bonds directly.”?

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Thanks for the suggestion, I’ve done that now :+1:

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I do not think either of these are available on Freetrade (and I’d argue that Russian state bonds are less risky than half of EU’s considering countries’ levels of indebtedness :wink: ). I meant the UK and US bonds with various maturity terms that can fit individuals’ risk appetites. Happy to go with 20-years’ waiting? Long maturity will pay more interest but you cannot know for sure how FRS will behave in 10-15 years. And vice versa - UK/US are unlikely to default within the next three years, hence the low risk and low premium.