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FAQ Page 3 - Question 29
Q: How can I use Spread Bets to speculate on UK interest rates?
A: The spread betting firms do not normally quote a market on UK base rates per se, instead they quote the Short Sterling contract. Short Sterling is a 3 month interest rate future which is highly correlated to base rates. If base rates were unexpectedly raised by 1% then the Short Sterling contract would also rise by 1%, or as is more commonly known 100 basis points.
However the Short Sterling contract is always moving everyday so a Bank of England rate rise may already have been priced into the market. Unlike most futures contracts Short Sterling will be quoted in many different months going out at least 3-5 years, so you can get a market on Sep 2006 interest rates for example. It's also very easy to price the contract up, just start with 100 and subtract the quote to give you the implied interest rate.
- For example if Sep Short Sterling is trading at 95.57 then the market is pricing in an interest rate of 4.43% for September, (100 - 95.57)
With spread bets you can also speculate on the interest rates of the European Union (Euro currency countries) using the Euribor contract and in the US using the Eurodollar contact which is not to be confused with the Euro currency against the Dollar. These other short term interest rate spread bets work in exactly the same way as the Short Sterling contract, 100 - the trading price gives you the implied interest rate for that country.
Finally whereas most people use spread bets for short term trading, interest rates actually move very slowly. A contract like Short Sterling may only have an average daily range of 5-8 points, and a move of over 100 point in a few months is often deemed to be very large. Take this into account if you want to trade them and alter your tactics so that positions are held for a few weeks if not months.
