{"id":20092,"date":"2022-10-14T05:52:18","date_gmt":"2022-10-14T05:52:18","guid":{"rendered":"https:\/\/mdr.foobrdigital.com\/?p=9862"},"modified":"2022-10-14T05:52:18","modified_gmt":"2022-10-14T05:52:18","slug":"how-bond-yields-affect-currency-movements","status":"publish","type":"post","link":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/2022\/10\/14\/how-bond-yields-affect-currency-movements\/","title":{"rendered":"How Bond Yields Affect Currency Movements"},"content":{"rendered":"\n

A bond<\/strong> is an \u201cIOU\u201d issued by an entity when it needs to borrow money.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

When you own a government bond, in effect, the government has borrowed money from you.<\/p>\n\n\n\n

You might be wondering, \u201cIsn\u2019t that the same as owning stocks?\u201d<\/p>\n\n\n\n

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<\/strong>, at a predetermined set date.<\/p>\n\n\n\n

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<\/strong>, at certain time intervals.<\/p>\n\n\n\n

These periodical interest payments are commonly known as coupon payments<\/strong>.<\/p>\n\n\n\n

Bond yield<\/strong> 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.<\/p>\n\n\n\n

Now, bond prices and bond yields are inversely correlated<\/em>. When bond prices rise, bond yields fall and vice-versa.<\/p>\n\n\n\n

Here\u2019s a simple illustration to help you remember:<\/p>\n\n\n\n

\"Bond<\/figure>\n\n\n\n

Still confused? How about this one?<\/p>\n\n\n\n

\"Bond<\/figure>\n\n\n\n

Wait a minute\u2026 What does this have to do with the currency market?!!<\/p>\n\n\n\n

Let\u2019s ignore that question for now.<\/p>\n\n\n\n

Always keep in mind that inter-market relationships<\/strong> govern currency price action.<\/p>\n\n\n\n

Bond yields actually serve as an excellent indicator of the strength of a nation\u2019s stock market, which increases the demand for the nation\u2019s currency.<\/strong><\/p>\n\n\n\n

For example, U.S. bond yields gauge the performance of the U.S. stock market, thereby reflecting the demand for the U.S. dollar.<\/p>\n\n\n\n

Let\u2019s look at one scenario:<\/strong> Demand for bonds usually increases when investors are concerned about the safety of their stock investments.<\/p>\n\n\n\n

This flight to safety drives bond prices higher and, by virtue of their inverse relationship, pushes bond yields down.<\/p>\n\n\n\n

As more and more investors move away from stocks and other high-risk investments, increased demand for \u201cless-risky instruments\u201d such as U.S. bonds and the safe-haven U.S. dollar pushes their prices higher.<\/p>\n\n\n\n

Government bond yields act as an indicator of the overall direction of the country\u2019s interest rates and expectations<\/strong>.<\/p>\n\n\n\n

For example, in the U.S., you would focus on the 10-year Treasury note.<\/p>\n\n\n\n

A rising yield is dollar bullish. A falling yield is dollar bearish.<\/strong><\/p>\n\n\n\n

It\u2019s important to know the underlying dynamic<\/strong> of why a bond\u2019s yield is rising or falling.<\/p>\n\n\n\n

It can be based on interest rate expectations<\/strong> OR it can be based on market uncertainty and a \u201cflight to safety<\/strong>\u201d with capital flowing from risky assets like stocks to less risky assets like bonds.<\/p>\n\n\n\n

After understanding how rising bond yields usually cause a nation\u2019s currency to appreciate, you\u2019re probably itching to find out how this can be applied to forex trading. Patience, young padawan!<\/p>\n\n\n\n

Recall that one of our goals in\u00a0forex trading\u00a0(aside from catching plenty of\u00a0pips!), is to pair up a strong currency with a weak one by first comparing their respective economies.<\/p>\n\n\n\n

How can we use their bond yields to do that?<\/p>\n","protected":false},"excerpt":{"rendered":"

A bond is an \u201cIOU\u201d 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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[809],"tags":[],"_links":{"self":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/20092"}],"collection":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/comments?post=20092"}],"version-history":[{"count":0,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/20092\/revisions"}],"wp:attachment":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/media?parent=20092"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/categories?post=20092"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/tags?post=20092"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}