Global Macro Investing and Yield Curve Strategies
The Treasury yield curve is one of the best and most applicable tools that a global macro investor can have in his or her toolbox. Most of the time used for bond trading there are several applications for it in the stocks and currency market as well. The truth is by using the yield curve correctly you can better trade just about everything.
While there are may types of yield curves the most commonly used and most applicable is that of the Treasury yield curve. All you need to do to make a yield curve is to obtain the yield on different Treasury maturities. Get the ninety day, two year, five year, ten year, and the thirty year yields and you will be able to plot them out and see the shape and levels of the yield curve.
Of course being able to tell what will happen in the economy does not always translate to being able to profit from it as the markets sometimes do their own thing, or at least that is how it can seem. So how does one apply the yield curve to their trading? The primary rule of thumb is that an upwards sloping yield curve is bullish for the economy while a downwards sloping yield curve is bearish. The steeper either curve is the better or worse it is. At least these are the general rules.
So how does this help your trading? Well if the curve is steep then there is little chance that bonds will be able to stage a very robust rally. At the same time it might be a great time to go long stocks. If the curve is sloping down then it is a harbinger of things to come and the economy is ready to contract and therefore it is kind of a sell signal for stocks. At the same time if the curve is inverted then it is a great time to look at going long bonds as the Fed will likely begin a interest rate easing cycle and therefore driving up bond prices.
If money is expensive then the economy will have a hard time expanding. If money is expensive for banks then they will not lend very much as they are not making money off of it. If money is cheap then the economy can grow easier as banks will lend and businesses will borrow more to expand and to spend.
Bonds are like a lever. When bonds are high yields are low. When yields are low bonds are high. It is like a board on a fulcrum, when one end goes up the other end goes down. This is how bonds and rates are related.
So if you are a global macro investor that is using the yield curve you can forecast when to get in and when to get out of stocks and bonds based on the macro economy. At the same time you can use the information and trade currency differentials as well.
Nothing is perfect and nothing works all the time. Any good global macro investor knows that to have long term success without blowing up you will need to use proper risk control gauges as well as other tools in your analysis. The yield curve is smart but it is not all knowing. - 23199
While there are may types of yield curves the most commonly used and most applicable is that of the Treasury yield curve. All you need to do to make a yield curve is to obtain the yield on different Treasury maturities. Get the ninety day, two year, five year, ten year, and the thirty year yields and you will be able to plot them out and see the shape and levels of the yield curve.
Of course being able to tell what will happen in the economy does not always translate to being able to profit from it as the markets sometimes do their own thing, or at least that is how it can seem. So how does one apply the yield curve to their trading? The primary rule of thumb is that an upwards sloping yield curve is bullish for the economy while a downwards sloping yield curve is bearish. The steeper either curve is the better or worse it is. At least these are the general rules.
So how does this help your trading? Well if the curve is steep then there is little chance that bonds will be able to stage a very robust rally. At the same time it might be a great time to go long stocks. If the curve is sloping down then it is a harbinger of things to come and the economy is ready to contract and therefore it is kind of a sell signal for stocks. At the same time if the curve is inverted then it is a great time to look at going long bonds as the Fed will likely begin a interest rate easing cycle and therefore driving up bond prices.
If money is expensive then the economy will have a hard time expanding. If money is expensive for banks then they will not lend very much as they are not making money off of it. If money is cheap then the economy can grow easier as banks will lend and businesses will borrow more to expand and to spend.
Bonds are like a lever. When bonds are high yields are low. When yields are low bonds are high. It is like a board on a fulcrum, when one end goes up the other end goes down. This is how bonds and rates are related.
So if you are a global macro investor that is using the yield curve you can forecast when to get in and when to get out of stocks and bonds based on the macro economy. At the same time you can use the information and trade currency differentials as well.
Nothing is perfect and nothing works all the time. Any good global macro investor knows that to have long term success without blowing up you will need to use proper risk control gauges as well as other tools in your analysis. The yield curve is smart but it is not all knowing. - 23199
About the Author:
If you need actionable trading ideas then check out The Macro Trader It is a weekly global macro investing advisory publication with frequent intra-week updates for time-critical analysis and actionable trading ideas.
posted by X - Men @ 3:51 AM
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