Bonds risks and margin

Discussion in 'Fixed Income' started by salamanderforex, Sep 17, 2020.

  1. Hi Bond Gurus,

    I am new to bonds and need to understand few things from you bond gurus please:

    1- Can I buy bond on margin?

    2- I have a margin account. Can I utilize my holdings of bonds for margin so I can trade other things or would my money get locked in bond? (i.e. If I buy Amazon stock I can utilize my investment to buy other shares with margin of that...are bonds the same in that aspect?)

    3- Who really buys bonds? Is the ultra rich who can't park their money in savings account or everyone? How can someone with small capital take advantage of buying bonds?

    4- What are the exact risks with holding bonds? please provide a $ amount example and cycle of what may happen.

    5- What are the benefits of buying bonds? At what time or a situation can one expect to make a profit?

  2. xandman


    Not a bond guru by any means but these questions look simple enough.

    1- yes

    2 - yes, yes, yes

    3- Everyone. Buy bond ETFs for diversification.

    4 - Duration risks will affect the bond value when interest rates change. $100 bond, Duration is 5 years. For every 1% that interest rates go up, you loose 5%. For every 1% rates go down, the bond value goes up 5%. (Approximately). Credit risks could affect the valuation of the bond by virtue of the Yield-to-Market pricing which is the yield demanded by buyers and sellers.

    5- Bonds are a promise to pay you a fixed return until the principal is returned. Stocks are about hopes and dreams. There is no promise to pay you a share of earnings. Earnings is typically retained in the company to fund additional growth.
    Last edited: Sep 19, 2020
    .sigma likes this.
  3. Nicely articulated. That was really insightful, thanks!
  4. bone

    bone ET Sponsor

    It's a ridiculous deep dive, but if you are serious I would recommend:

    The Handbook of Fixed Income Securities, 6th Edition
    Book by Frank J. Fabozzi

    I read this before I started trading fixed income futures. I also took courses from LIFFE, CME, and CBoT on various fixed income topics.

    But if you are just fixed income curious, the internet might suffice.

    .sigma and xandman like this.
  5. never2old


    what type of Bonds are you looking at or is it Bond funds/ETF's?

    are you looking for stability or yield or both?
  6. I have a picture that I can buy bonds for little profits and yet use that as margin to do day trading. All of this is read of keep cash in account which is what happens these days with a lot of people who are worried about a big drop.
  7. bone

    bone ET Sponsor

    I used to keep T-Bills in my futures account, but that practice isn't really supported these days. I've kinda gone the other way since the Man Financial and PFG Best debacles - I keep modest capital in my account and if they need margin I can wire it in 30 minutes. I've had some clients get trapped by those first two instances I noted above; while they were eventually made whole, the time delay and anxiety and lost opportunities cost was definitely a bitter lesson.

  8. never2old


    OK looks good on the surface, yet as you know Bonds can & do waffle up & down, in the wrong direction on margin you will get a margin call.

    which type of bonds are you considering?
    Last edited: Oct 12, 2020
    murray t turtle likes this.
  9. Thanks for the links. CDs won't help in this consideration because one can't use margin.

    I don't know which kind exactly but hoping for one that gives even 0.0005% and is the safest(?).

    If bonds go up and down a lot as well(?), what is their value then compared to other equities?
  10. never2old