Bond futures are a kind of financial contracts that require contract holders to buy or sell a bond on a particular date with a price that is previously determined. The expiration date as well as the price are set when the future is bought or sold.
Typically, a bond futures contract is like an agreement reached by two parties. One of the party decides to purchase an asset, which often includes Treasury bonds, Treasury bills, and Treasury notes, on a particular date at a predetermined price, and the other party agrees to sell the asset under the same condition. When the date previously set approaches, the seller is supposed to deliver the asset to the buyer.
A bond futures contract usually trades on a futures exchange market and is purchased and sold via a brokerage institution that provides futures trading. Bond futures are standardized through future exchanges, and they are regarded as one of the most liquid financial products.
Bond futures contracts can either be held till maturity or be closed out before the expiration date. If the party that set the position closes out ahead of the maturity date, the result will be either a profit or a loss, based on the contract’s current value.
Bond futures contracts enable investors to speculate on a bond’s price movement and set a price for a specific future period. If someone purchases a contract, the price of the bond rises, and it closes higher than the predetermined price, then he or she will have a profit.
Since bond prices can fluctuate greatly from time to time for various reasons, bond futures may be used to generate substantial profits. However, traders still can lose money due to price fluctuations.
People can trade futures contracts through margin, which means they only have to put up a small percentage of the whole value of the contract into a trade. Usually, there will be a minimum margin requirement, but the broker can decide an initial margin based on specific conditions.
One thing you have to bear in mind about the bond futures is that although bond futures can be used to bet on bond price or earn huge profits, they also involve unlimited risks that may cause significant losses due to various factors like changing price and the high leverage in margin trading.