Interest Rates

How Should you Trade Interest Rates?

Interest rate trading lets you focus on short term lending markets and speculate on the future movement of interest rates.  For example, the base rates set by the UK’s Bank of England or the rates at which banks lend to each other.

How do Interest Rates work?

Interest rate prices displayed are the future rate deducted from 100. For example, a price of 95 would indicate that the market is expecting future interest rates to be 5% (100-5). Interest rates are typically traded as future contracts or over the counter (OTC) between two counterparties.

Where are Interest Rates Traded?

Interest rates are typically traded as futures contracts on futures exchanges. Interest rate futures constitute one of the largest financial markets in the world in terms of their daily volume. There are many companies and investors who want to be able to protect themselves from the risk of interest rates changes by hedging.

Interest rate futures can also be traded bi-laterally between direct counterparties over-the–counter (OTC).

What moves Interest Rate Markets?

Rates set by central banks, including expectations of future rate changes

Health of a country’s economy

Inflation – higher inflation may cause central banks to raise rates

Lack of confidence on the part of banks in lending to each other

Lack of liquidity in the interbank market – this means that there are fewer banks willing / able to lend, allowing those that will lend to raise their rates, especially on short term money.

We cover some fundamental strategies around trading interest rates later on in the course. Including the effects they have on the FX markets.