How Bond Yields Affect Currency Movements

A bond is an “IOU” issued by an entity when it needs to borrow money. An IOU, a phonetic acronym of the words “I owe you,” is a document that acknowledges the existence of a debt. Yields do reflect growth expectations, which eventually drives the inflation trend. Yields matters in forex market, when the broad currency moves are driven by the expectations of central bank financial policy stances. These entities, like governments, municipalities, or multinational companies, need a lot of funds in order to operate so they often need to borrow from banks or separate person just like you .

Assuming you own a government bond, in effect, then the government has borrowed money from you. You can be wondering, “Isnt that the same like having stocks？”. Actually there is a difference and One great difference is that bonds in forex trading have a normally defined term to maturity, since the owner gets paid back the money he loaned, called the lead at a predetermined set date. Similarly, when an investor collects a Marketing bond from a company, he gets paid at a designated percentage of return, this is popularly called the bond yield, while at a certain time intervals. These periodical interest payments are commonly called coupon payments.

Therefore can explain Bond Yields as the amount of return or interest paid to the bondholder while the bond price is the sum of money the bondholder pays for the bond. Now, bond prices and bond yields are matched in opposition. When bond prices rise, bond yields fall and vice-versa. Let's look at a simple illustration to help you understand and to be able to recall:

How about this one？

Relax a bit.Does this have something to do with the currency market？!! Let‘s jut skip that question for now. Always bear in mind that inter-market relationships leads currency price action. Generally, the fact about the yield is that, it works perfectly and still taken as the count of the strength of a nation’s stock market, and by this the demand for the nations currency gets enlarged.

Let's take an example, U.S. bond results has compute the performance of the U.S. stock market, thereby reflecting the demand for the U.S. dollar. Let's take Look at one scenario: Demand for bonds usually increases when investors are cared much about the safety of their stock investments. Their concern over the safety drives bond prices higher and, by virtue of their reversed relationship, pushes bond down. As more and more investors keep themselves away from stocks and other high-risk investments, and increased demand for “less-risky instruments” like U.S. bonds and the safe-haven U.S. dollar pushes their prices higher. Government bond use it to be indicator of the overall direction of the countrys interest rates and expectations.

For example, in the U.S., you would Centre yourself on the 10-year Treasury note. A yield that is progressing is dollar bullish. Otherwise is dollar bearish. It‘s considered crucial to know the Primary changes of why a bond’s Results is rising or falling. And this can be based on expectations from the gain amount it can depends on market uncertainty and a “flight to safety” with capital flowing from the property that are risky like stocks to less sensitive property, Like say a bonds. After understanding how rising bond usually cause a nations currency to rise, probably you are now anxious to find out how this can be applied to forex trading. Alright, cool young man...

Remember that one of our goals in forex trading (apart from catching plenty of pips!), is to pair up a strong currency with a weak one by first comparing their respective economies. Now How can we use their bond yield to do that？