Bond trading is the buying and selling of debt securities issued by governments, companies and other borrowers. Traders and investors use it to seek income and capital gains, or to manage exposure to interest rates and credit risk.
Most bonds change hands in over-the-counter markets through dealers rather than on a central exchange. Quotes are shown as a price expressed as a percentage of face value and as a yield that reflects the bond’s cash flows.
What exactly is being traded and how bonds are quoted
A bond is a loan packaged into tradable form. The issuer promises periodic interest payments known as coupons and the return of principal at maturity. Common types include government bonds, investment grade corporate bonds, high yield bonds, local authority or municipal bonds, supranational issues, and inflation-linked bonds where the principal or coupons move with an inflation index.
Prices are usually quoted per 100 of face value. A price of 102.50 means £102.50 for each £100 of nominal. Two prices matter:
- Clean price excludes interest that has accrued since the last coupon date.
- Dirty price is clean price plus accrued interest, which is what buyers actually pay and sellers receive on settlement.
Quotes also display a yield. The most used is yield to maturity, the single discount rate that equates the price with all remaining coupons and the redemption payment. You may also see current yield, which is the annual coupon divided by price, and yield to call for callable bonds that could be redeemed early.
How bond trades execute in practice
New bonds are issued in the primary market. Governments typically sell via auction, while companies place deals with underwriting banks that place the bonds with investors. After issue, trading happens in the secondary market, largely dealer-driven.
Execution methods vary:
- Request for quote RFQ platforms let you ask several dealers for a price, then you choose the best firm quote for the size you need.
- Order books and all-to-all venues exist in some markets, especially for government bonds and more liquid corporate names, where you can submit limit or marketable orders.
- Telephone dealing is still common for large or complex trades.
Retail access differs by provider. Some brokers offer a limited list of bonds or bond ETFs. Minimum denominations can be £1,000, £10,000 or more, and some issues trade only in professional sizes. Fees, platform features and whether you trade the actual bond or a derivative such as a CFD or futures contract vary by provider.
Price, yield and the inverse relationship
Bond prices and yields move in opposite directions. If required yields rise, the fixed coupon is less attractive so the price falls. If required yields fall, prices rise.
Two tools help explain the sensitivity:
- Duration is the approximate percentage price change for a 1 percentage point change in yield. A bond with duration of 5 years may drop about 5 percent if yields rise by 1 percentage point, and gain about 5 percent if they fall by the same amount. It is an approximation that improves for small moves and for non-callable bonds.
- Convexity captures the curvature in the price-yield relationship. It means prices rise a little more when yields fall than they decline when yields rise by the same amount, other things equal.
Market yields are influenced by expected policy rates, inflation views and credit risk. Central bank decisions on the base rate often ripple across the government yield curve, which in turn anchors many corporate bond yields through a government plus credit spread structure.
Costs, spreads and settlement basics
There are two main price points on the screen. The bid price is what a buyer is quoting to pay now. The ask or offer is what a seller wants to receive. The gap is the bid-ask spread, often quoted in basis points of yield or fractions of a price point. Spreads tend to be tighter for large, on-the-run government bonds and wider for smaller, lower rated or older issues.
Beyond the spread, you may pay commission or a dealer markup. For less liquid bonds, the whole cost of immediacy can be embedded in the spread rather than stated as a fee. Always check how your provider charges and whether quotes are firm for your trade size.
Settlement conventions differ by market and bond type. Many government bonds settle the next business day, and many corporate bonds two business days, but this can vary. Coupons are paid on scheduled dates, often semi-annual. If you buy between coupon dates you will pay accrued interest to the seller and then receive the full coupon on the next payment date.
Risks specific to trading bonds
- Interest rate risk. Prices can fall when market yields rise. Longer duration increases this sensitivity.
- Credit risk. The issuer may be downgraded or fail to pay. Credit spreads can widen quickly in stress. Ratings range from investment grade to high yield, but ratings are opinions not guarantees.
- Liquidity risk. Some bonds trade rarely. You may need to accept a worse price to exit, particularly in large sizes or during volatile periods.
- Call and structure risk. Callable or putable bonds, perpetuals, and hybrids behave differently from plain vanilla issues. Prices can react to changes in the probability of a call.
- Inflation and currency risk. Fixed coupons lose real value if inflation is higher than expected. Foreign currency bonds bring exchange rate risk unless hedged.
- Reinvestment risk. Coupons received may need to be reinvested at different rates, which affects achieved returns versus quoted yield to maturity.
Tax treatment of coupons and capital gains differs by jurisdiction and account type and can change. If tax matters to you, check the current rules that apply to your situation.
An example trade from quote to exit
Say you see a 5 year corporate bond with a 4 percent annual coupon priced at 98.00 clean. The dirty price today is 98.60 because two months of interest have accrued since the last payment. You buy £20,000 nominal. Your cash outlay is £19,720 clean plus £120 accrued interest, plus any commission.
The quoted yield to maturity is 4.6 percent at your entry price. Over the next few months, market yields for similar credit fall by 0.5 percentage points because the rate outlook softens and credit spreads tighten. With a duration around 4.7, you would expect a price move of roughly 2.35 percent 0.5 x 4.7, ignoring convexity and any change in the bond’s specific credit view. The clean price might rise to about 100.30, other things equal.
You decide to sell. Since you bought, a further month of interest has accrued, which lifts the dirty price you receive. Suppose the clean price is 100.30 and accrued interest now stands at 0.35. If you can sell at the displayed bid and your costs are small, your gross capital gain is about 2.30 points per 100 nominal, plus you will have received one coupon if a payment date passed during your holding period. Your realised return combines price change, coupons earned while holding, and the effect of accrued interest paid and received.
This simple example sidesteps real world wrinkles such as different settlement calendars, odd first or last coupon periods, and potential liquidity gaps. It does show how most bond trading P&L decomposes into three parts often called carry the coupon income you earn while holding, roll down any price lift as the bond “rolls” down a sloping yield curve toward maturity, and the mark to market move from changes in overall yields or credit spreads.
Where you encounter bond trading day to day
Private investors most often access bond exposure through funds and ETFs that pool many issues, smoothing out idiosyncratic liquidity. Direct bond trading is common for wealth managers and institutions, who can negotiate sizes and prices with multiple dealers. Companies and governments use bond markets to finance spending, so their treasury teams are active around issues and buybacks.
On screens you will see government benchmark yields that set the tone for mortgages and corporate borrowing, credit spread indices that track the extra yield investors demand for taking credit risk, and primary deal calendars showing upcoming sales. All of these feed into the prices and yields you are quoted if you decide to trade.