Preschool>= Lesson Status ?
Kindergarten>= Lesson Status ?
Elementary>= Lesson Status ?
Grade 1 Support and Resistance Levels
Grade 2 Japanese Candlesticks
Grade 3 Fibonacci
Grade 4 Moving Averages
Grade 5 Common Chart Indicators
Middle School>= Lesson Status ?
Grade 7 Important Chart Patterns
Grade 8 Pivot Points
Summer School>= Lesson Status ?
High School>= Lesson Status ?
Grade 9 Trading Divergences
Grade 10 Market Environment
Grade 11 Trading Breakouts and Fakeouts
Grade 12 Fundamental Analysis
Grade 13 Currency Crosses
- What is a Currency Cross Pair?
- Crosses Present More Trading Opportunities
- Cleaner Trends and Ranges
- Taking Advantage of Interest Rate Differential
- Obscure Crosses
- Planning Around News and Fundamentals
- Creating Synthetic Pairs
- Euro and Yen Crosses
- How to Use Crosses to Trade the Majors
- How Cross Currency Pairs Affect Dollar Pairs
- Summary: Currency Crosses
Grade 14 Multiple Time Frame Analysis
Undergraduate>= Lesson Status ?
- Why Keep a Trade Journal?
- Benefits of Keeping a Journal
- What Should You Record in Your Journal?
- Potential Trading Area
- Entry Trigger
- Position Sizing
- Trade Management Rules
- Trade Retrospective
- Trading Journal Statistics
- Reviewing Your Trading Journal
- Difficulties of Keeping a Trade Journal
- Summary: Keeping a Trade Journal
Graduation>= Lesson Status ?
- Which Trading Style is Best for You?
- Which Currencies Should You Trade?
- What is Your Level of Trading Experience?
- Should You Be a Discretionary, Mechanical, or Hybrid Trader?
- What Kind of Mechanical System Suits Your Personality?
- What is Your Attitude Towards Risk?
- What Kind of Stop Suits Your Trading Style?
The 411 on Bonds
A bond is an "IOU" issued by an entity when it needs to borrow money. These entities, such as governments, municipalities, or multinational companies, need a lot of funds in order to operate so they often need to borrow from banks or individuals like you. When you own a government bond, in effect, the government has borrowed money from you.
You might be wondering, "Isn't that the same as owning stocks?"
One major difference is that bonds typically have a defined term to maturity, wherein the owner gets paid back the money he loaned, known as the principal, at a predetermined set date. Also, when an investor purchases a bond from a company, he gets paid at a specified rate of return, also known as the bond yield, at certain time intervals. These periodical interest payments are commonly known as coupon payments.
Bond yield refers to the rate of return or interest paid to the bondholder while the bond price is the amount of money the bondholder pays for the bond.
Now, bond prices and bond yields are inversely correlated. When bond prices rise, bond yields fall and vice-versa. Here's a simple illustration to help you remember:
Wait a minute... What does this have to do with the currency market?!
Always keep in mind that inter-market relationships govern currency price action.
In this case, bond yields actually serve as an excellent indicator of the strength of the stock market. In particular, U.S. bond yields gauge the performance of the U.S. stock market, thereby reflecting the demand for the U.S. dollar.
Let's look at one scenario: Demand for bonds usually increases when investors are concerned about the safety of their stock investments. This flight to safety drives bond prices higher and, by virtue of their inverse relationship, pushes bond yields down.
As more and more investors move away from stocks and other high-risk investments, increased demand for "less-risky instruments" such as U.S. bonds and the safe-haven U.S. dollar pushes their prices higher.
Another reason to be aware of government bond yields is that they act as indicator of the overall direction of the country's interest rates and expectations.
For example, in the U.S., you would focus on the 10-year Treasury note. A rising yield is dollar bullish. A falling yield is dollar bearish.
It's important to know the underlying dynamic on why a bond's yield is rising or falling. It can be based on interest rate expectations or it can be based on market uncertainty and a "flight to safety" to less-risky bonds.
After understanding how rising bond yields usually cause a nation's currency to appreciate, you're probably itching to find out how this can be applied to forex trading. Patience, young padawan!
Recall that one of our goals in currency trading (aside from catching plenty of pips!), is to pair up a strong currency with a weak one by first comparing their respective economies. How can we use their bond yields to do that?
While you are logged into your account,
you can save your progress in the School of Pipsology!
- As Gold as it Gets
- Black Crack
- The 411 on Bonds
- Bond Spreads
- Bond Markets, Fixed Income Securities, and the Forex Market