{"id":146093,"date":"2019-04-19T12:11:35","date_gmt":"2019-04-19T16:11:35","guid":{"rendered":"https:\/\/www.countingpips.com\/?p=146093"},"modified":"2019-04-19T11:18:08","modified_gmt":"2019-04-19T15:18:08","slug":"why-should-forex-traders-care-about-bond-yields","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2019\/04\/why-should-forex-traders-care-about-bond-yields\/","title":{"rendered":"Why Should Forex Traders Care About Bond Yields?"},"content":{"rendered":"
April 19, 2019<\/div>
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By <\/strong>Orbex<\/strong><\/a><\/p>\n

Bonds have a significant role in determining the direction of currencies and exchange rates,<\/p>\n

If you haven\u2019t been tracking them as part of your trading, here\u2019s a good primer on why you should and how they influence the currency pairs in your portfolio.<\/p>\n

The Bond Market<\/strong><\/h2>\n

Bonds are a trading specialty in their own right.<\/p>\n

You don\u2019t need to be an expert in bonds in order to understand their influence on currency markets. Because bonds are so closely connected to currency pairs, bonds traders find it an easy transition to forex and vice versa.<\/p>\n

This is partly because bond rates typically move in tandem with currency pairs. And things that influence currencies also influence bonds. Or, more accurately, economic events influence bonds which influence the currency.<\/p>

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From a forex trader\u2019s perspective, we focus on the most important of the bonds:\u00a0treasuries or sovereign bonds.<\/strong><\/p>\n

These are debt commitments issued by the government, and virtually all the debt of a country is denominated in bonds. These bonds are considered the most reliable. They are the ones that are most likely to be paid off and can function in the same way a currency can. Often,\u00a0big corporate deals will be paid with bonds<\/strong>\u00a0instead of actual cash, because it\u2019s more convenient.<\/p>\n

Bond Prices and Yields<\/strong><\/h2>\n

A bond is a commitment by the issuer to pay a certain amount of money in the future, plus interest rates. So, it\u2019s like a loan. But, unlike a loan,\u00a0it\u2019s transferable<\/strong>. You can buy and sell bonds.<\/p>\n

The price of a bond depends on how likely the bond issuer is to pay the bond back, plus the interest rate. If the issuer is less likely to pay the bond back, then the interest rate needs to be higher to offset that risk and incentivize people to buy it.<\/p>\n

Rising economic risk, therefore, translates into\u00a0higher bond interest rates, which is called the yield.<\/strong><\/p>\n

The United States is seen as one of the most stable economies, and their government is the most likely to pay their bonds. Therefore, interest rates on their bonds are low.<\/p>\n

By contrast, a country with a worse economic outlook, such as Turkey, will have a higher interest rate on their bonds. This interest rate differential is what leads to carry trading, one of the driving forces behind currency values.<\/p>\n

The interest rate paid on bonds is related to the reference rate of the central bank. Investors can choose to deposit their money in the bank or buy a bond.<\/p>\n

Since they can take the money out of their account whenever they want, but the bond has a fixed time (for example, 1 year; you can\u2019t redeem your bond until a year from now),\u00a0bonds have a higher risk<\/strong>. They also have\u00a0a higher interest rate<\/strong>\u00a0than bank deposits. Increasing the reference rate translates into higher bond yields, and lower interest rates to lower yields.<\/p>\n

The Search for Yields and Return to Safety<\/strong><\/h2>\n

Interest rates influence the value of a currency because of the demand for buying bonds in that currency. Countries with higher interest rates will attract more investors in their bonds, wanting to get a higher yield. And, the demand for the currency needed to buy those bonds makes that currency stronger. And vice versa.<\/p>\n

The reason governments don\u2019t just jack the interest rate in order to get all the money flowing into their country is that it increases the cost of servicing their own debt. Also, as interest rates increase, it makes bonds more attractive compared to other more risky investments, such as stocks or buying things. And this reduces activity in the economy.<\/p>\n

Poor economic performance translates into lower interest rates, as regulators try to stimulate their economies. That means bad economic news lowers demand for bonds in that currency. This translates into a lower value of the currency. And this is how a risk-off environment strengthens \u201csafe haven\u201d currencies while weakening emerging market currencies.<\/p>\n

Bond Yields as a Gauge of Currency Moves<\/strong><\/h2>\n

Bond yields move as investors balance their desire for more return on their investment compared to the risk of default (or ability to sell the bond in the future). This leads to currency flows between countries that cause their respective\u00a0pairs to move<\/a>. And that\u2019s\u00a0why traders can know what is happening in the currency market by looking at bonds, and vice versa.<\/p>\n

By <\/strong>Orbex<\/strong><\/a><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

By Orbex Bonds have a significant role in determining the direction of currencies and exchange rates, If you haven\u2019t been tracking them as part of your trading, here\u2019s a good primer on why you should and how they influence the currency pairs in your portfolio. The Bond Market Bonds are a trading specialty in their […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-146093","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/146093","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=146093"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/146093\/revisions"}],"predecessor-version":[{"id":146102,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/146093\/revisions\/146102"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=146093"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=146093"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=146093"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}