Spread betting on interest rates is a popular market, when spread betting on Interest Rates you should start trading UK interest rate as the kind of things that move interest rates (many of them mentioned in the video below) will be all over the news so you should have all the information necessary to react quickly to movements.

There are two sorts of contracts you can spread bet on:

• Short term interest rates
• Long term interest rates

Short term interest rate spread betting lets you take a position on a country’s 3 month interest rates. The price of a 3-month contract is quoted as 100 minus the interest rate. So if the UK interest rate is 3% the contract price will be 97 (or 9700). If this rate rises to 4% the contract price will fall to 96 (100-4).

So when spread betting you need to sell the contract if you expect interest rates to rise and buy the contract if you expect rates to go down. This may seem counter-intuitive but that's the way it is!

Long term interest rates tend not to move much in a day so it is not one of the most popular spread betting markets however, the mechanics are basically the same as in short term interest rate spread betting. Betting on longer term interest rates would normally involve buying a government Treasury Bond.

One benefit of spread betting on long term interest rates rather than buying the underlying asset is that you can remove the foreign exchange risk of purchasing a foreign bond as spread bets are denominated in the home currency.

Note that a tradable point when betting on interest rates is 0.01% i.e. if the interest rate has gone from 1% to 1.01% it has gone up by one bp.

Before betting on interest rates take a look at the spread betting comparison table to see who has the tightest spreads on these markets.

Examples of spread betting on interest rates

Short term – Selling 3 month sterling deposits

You believe interest rates are only going in one direction up! Inflation is going up and you think the UK rate setters are going to have to do something about it. Remember, spread betting on interest rates is counter-intuitive, when you think the rates are going up you need to SELL 3-month sterling deposits.

The spread at the time is 9495-9500, which equates to an interest rate range of 5.00%-5.05%. You bet £2 a point.

 

• What happens if UK interest rates go up to 6.45%-6.50%

The spread at this interest rate would be 9350-9355.

Opening price – sell at 9495 (5.05%)

Closing price – buy back at 9355 (6.45%)

Difference – 140 points (9495 less 9355)

Profit - £280 (140 points * £2 a point)

 

• What happens if UK interest rates go down to 3.95%-4.00%

The spread at this interest rate would be 9600-9605.

Opening price – sell at 9495 (5.05%)

Closing price – buy back at 9605 (3.95%)

Difference – 110 points (9605 less 9495)

Loss - £220 (110 points * £2 a point)

Note this trader will have benefitted from taking out a stop or a guaranteed stop.