A Comprehensive Guide to Invest in Bond Futures

What are Bond Futures?

Bond futures are derivative financial instruments that allow traders to speculate on changes in bond prices.
Bonds issued by governments or corporations serve as the basis for these derivative transactions.
Bond futures allow investors to hedge against interest rate fluctuations and make money off of changes in bond prices.
Bond futures in India are classified as Interest Rate Derivatives and traded on the NSE.

In India, bond futures are traded on the NSE, currently on two instruments:

NBF II (NSE Bond Futures II): These agreements are backed by securities issued by the Government of India (GOI). There are three distinct time frames to choose from: four to eight years, eight to eleven years, and eleven to fifteen years.
91DTB – These bond futures are a proxy for the 91-day Government of India treasury bill.

NBF II: Futures contracts on NBF II bonds are marked to market and settled at the end of each trading day. The volume-weighted average futures price is used to calculate the cash settlement that occurs each day. The ultimate settlement is also determined in cash and is equal to the bond’s weighted average price.
91DTB:When they mature, Treasury notes are redeemed at face value despite being issued at a discount. The investor receives interest on the premium they receive from the issuance price minus the maturity value.

Several factors can impact bond futures prices, including:

Interest rates: As interest rates change, bond prices and bond futures prices tend to move in opposite directions.
Economic indicators: Economic data, such as inflation and GDP growth, can influence interest rates and, consequently, bond futures prices.
Market sentiment: Investor sentiment and expectations about future interest rate movements can also affect bond futures prices.

NEAT (National Exchange for Automated Trading) is the NSE’s automated screen-based trading system where bond futures are transacted.

NEAT is an order-driven market that facilitates the trading of bond futures in an open, efficient market.

Investing in bond futures offers several benefits, such as

Hedging against interest rate risk: Bond futures provide insurance against interest rate volatility for investors in fixed-income securities.
Speculation: Bond prices are susceptible to market fluctuations, which can be used to your benefit.
Portfolio diversification: You can further spread your investment risk by using bond futures in your portfolio.

Although bond futures could be advantageous, they do have some dangers such

Market risk: Bond futures are vulnerable to market risk, which means that if the market swings against your position, you could incur losses.
Leverage risk: Bond futures are leveraged contracts, allowing you to hold a huge stake with a small initial investment. This can accentuate benefits, but it also do the same for drawbacks.
Liquidity risk: Liquidity risk occurs when bond futures are less liquid than the underlying bonds, making it difficult to sell at the desired price.