Wondering what tradable debt securities are and debt trading is? Tradable debt securities are bonds issued by the U.S. government, state as well as local governments and corporations. Debt security trading is actually earning profits from changes in interest rates or in other words, it is about gaining profits by holding a position in distressed companies.
Trading debt is generally regarded as an alternative to stock market or commodities trading. If you are intimated by all these technical jargons and terminologies and want the advantages and disadvantages of debt trading to be explained in layman’s terms, this article can help you out. If you like to stay away from financial blues, sufficient knowledge of debt trading can certainly help you a lot.
Pros
• Treasury securities, like bills, notes and bonds, are usually traded to make the most of changing interest rates. Here, if the rates fall, treasury prices go up and when the rates rise, prices fall. Traders can try their hands on treasury securities even with a low margin deposit. Margin brokerage usually needs the minimal margin deposits of 5 to 10 percent for treasury securities, depending on the maturity length of the bonds.
• Perhaps all active futures market proffers stupendous trading in contracts of variety of debt securities. Contracts usually trade against the major treasury securities, the Federal funds rate and interest rate indexes. Futures trading prepare the traders for moves in either direction of the prices of debt securities or the associated interest rates. Futures trading of debt securities carry a considerable amount of risk with it, and if the trader makes a wrong move in trading, he can even lose the amount he initially invested.
Cons
• If compared to stocks or commodities, you will find debt securities have relatively smaller price changes. Traders in debt securities are required to take larger positions to gain the equal level of profits. Sometimes, in an exceptionally poor trading day individual stocks or even stock indexes move two percent or more, whereas, debt securities takes over several weeks or a month to move two percent. Even with ten-to-one leverage, trading debt securities needs the trader to use comparatively larger position sizes than a stock market trader.
• The debt trading markets are actually subjugated by hedge funds and the trading desks of large financial organizations. As an invariable result, these traders have greater access to information and capital which is simply impossible for the individual trader to avail. In fact, by the time the small traders come to know about the news that these large players are trading on, it already becomes too late to profit from those information.
• Last but not the least, traders in corporate debt securities trade high-yield or junk bonds in order to earn the higher interest rates that these bonds pay. In fact, the trader can also attain capital gains provided the issuing corporation gets an upgrade in its credit rating. The shortcoming of high yield bonds is it involves a high risk of bankruptcy and total loss of the principal invested. For example, when companies like General Motors, or Lehman Brothers declared bankruptcy, their debt securities are worth for pennies on the dollar.
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