Interest rate spread betting can appear confusing at first, but the principles remain the same as all other spread bets. With interest rate betting, you are simply betting on the movement of the interest rate and there are two types of interest rates to bet on.
Long-Term and Short-Term Interest Rates
Unlike most other markets, interest rates do not move constantly throughout the day – in almost all cases the rate of interest is determined by a country’s central bank and are reviewed monthly.
Short-Term Interest Rate Betting
A short-term interest rate is also known as a 3-month interest rate; your bet will need to correctly predict the movement of this rate.
Short-Term Interest Rate Example
The price of the June 2013 3-month interest rate is 98.10/98.13 i.e. an expected interest rate of 1.90% in June.
Some spread betting platforms do not include the decimal point; 9810/9813.
The current interest rate is 0.50%, so this quote predicts that the 3 month-interest rate in June 2013 will rise by 1.40%.
You decide that interest rates are going to remain unchanged at 0.50% for the foreseeable future and therefore decide to buy at £10 per point.
In June the 3 month interest rate holds steady at 0.50% and the quote is now 9895/9898; you decide to take your profit and sell your position.
Opened: 9813 / Closed: 9895 / Difference: 82 / Profit: £820
Long-Term Interest Rate Betting
A long-term interest rate is based on government bonds. When bond prices rise, interest rates fall – meaning that you would have to buy government bonds if you were predicting a reduction in the long-term interest rate.
Long-Term Interest Rate Example
On December 1st 2012 the price of a UK long gilt future is 12495/12498. We expect that the long-term interest rate will rise and opt to sell the UK long gilt future at 12495 for £10 per point.
Two weeks later on December 15th, news emerges that forces the gilt future even higher to 12525/12528; we decide to cut our losses and close our position by buying at 12528.
Opened: 12495 / Closed: 12528 / Difference: 33 / Profit: -£330