| Trading the Forex with Bonds - Part 1 |
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Most investors have no idea how bond or note yields affect the forex or any other capital market. This is unfortunate because they play a major role in what happens to capital flows and can be used to time and manage forex trades. In today's video we are going to continue our intermarket discussion by learning how the 10 year treasury note works before we start to look at this market from a forecasting perspective. Here are a few terms to get straight. Par value: This is the amount you will get when the note matures or expires. If you bought one 10 year t-note you would be paid $100 because par value of these notes is $100 exactly.
Interest: A t-note also pays you interest on that par value every 6 months. The most recent interest rate offered on t-notes was 3.875%.
Price: A bond's price does not necessarily equal its par value. Although a bond pays interest, investors may not be willing to pay the full $100 for it and it will have to be discounted. A 10-year note may be worth $99 or less at times when demand for them is low. Similarly, if demand for 10-year notes is high then it may cost you more than $100 to buy them.
Yield: If you wanted to sell that note later so you could invest in something else, you may have to offer it at a discount. For example, if you bought a t-note for $100 and then later had to sell it before it matured in 2018 you may only be paid $99 for it. This means that the note buyer is getting a discount plus all the future interest payments. When you add those two things together you get the current yield for the note.
As you can imagine, investors want to dump notes on the market when other higher yielding assets look good. Therefore, if the stock market is rising and looks more attractive to investors then the prices of these bonds will drop and that pushes the total yield up. Similarly, if the stock market looks really bad, traders will want to put money into less risky assets like notes and that pushes the price up and the total yield will drop.
What do you think about intermarket analysis? We have talked previously about the influence that the VIX or equities has on the forex but what other relationships do you want to know about? Let us know in the forums.
Also feel free to browse through the video archives here.
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