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.
The Treasury yield curve is the curve you get when you plot out the yields for different maturities. For instance if the 90-day T-Bill is at .2 percent and the 10-year T-Note is yielding 3.5 percent you have an up sloping yield curve as the long dated Treasuries are paying a higher yield then the short dated Treasuries. Usually you would also plot out the two year, five year, and thirty year along with the ninety day and ten year. This will give you a better picture for what the yield curve is really saying.
This is great but how do you use it to make money? Well the global macro investor knows that if the curve is sloped from the lower left to the upper right that things are looking good for the economy. If on the other hand it is sloping downwards the Fed has tightened and the economy is or will be slowing.
You may be asking yourself why this is. The reasons are actually fairly simple and straightforward. If the curve is steep, meaning the short term rates are low and the long term rates are high it means that banks are lending as they are able to borrow short term from the Fed and charge long term rates to their customers. Obviously when business is good for the banks, they will be lending as much as they can. This in turn spurs new business spending as money is available.
If the curve is inverted however business is usually about to slow down, rates will be lowered, and bonds will climb. This is because with the incentive of the banks to lend now gone they will throttle back and the spigots of available money run dry. In turn this forces the Fed to lower short term rates, the Fed Fund rate, in order to spur business growth once again. When they lower rates bonds inevitably go up.
Think of bonds and interest rates as a teeter totter where yields are on one side and bonds are on the other. If bonds go down, rates go up. If rates go down, bonds are going up. In a regular inflationary environment this is always the case unless there is a severe credit quality issue.
If this is the case then anytime you can forecast the yield curve to show when the Fed will be lowering rates you can jump on it and go long bonds, typically with little risk. At the same time whenever you see rates being lowered you can wait a while and then go long stocks.
Neither of these relationships works perfect every time so it is important to still use risk controls. In fact if you had gone long stocks in 2008 when they lowered rates you would have lost a lot of money, but more often then not this trade and the concept behind it work well. Look at the yield curve, learn from it, and apply it to your market forecasting toolbox. - 23221
The Treasury yield curve is the curve you get when you plot out the yields for different maturities. For instance if the 90-day T-Bill is at .2 percent and the 10-year T-Note is yielding 3.5 percent you have an up sloping yield curve as the long dated Treasuries are paying a higher yield then the short dated Treasuries. Usually you would also plot out the two year, five year, and thirty year along with the ninety day and ten year. This will give you a better picture for what the yield curve is really saying.
This is great but how do you use it to make money? Well the global macro investor knows that if the curve is sloped from the lower left to the upper right that things are looking good for the economy. If on the other hand it is sloping downwards the Fed has tightened and the economy is or will be slowing.
You may be asking yourself why this is. The reasons are actually fairly simple and straightforward. If the curve is steep, meaning the short term rates are low and the long term rates are high it means that banks are lending as they are able to borrow short term from the Fed and charge long term rates to their customers. Obviously when business is good for the banks, they will be lending as much as they can. This in turn spurs new business spending as money is available.
If the curve is inverted however business is usually about to slow down, rates will be lowered, and bonds will climb. This is because with the incentive of the banks to lend now gone they will throttle back and the spigots of available money run dry. In turn this forces the Fed to lower short term rates, the Fed Fund rate, in order to spur business growth once again. When they lower rates bonds inevitably go up.
Think of bonds and interest rates as a teeter totter where yields are on one side and bonds are on the other. If bonds go down, rates go up. If rates go down, bonds are going up. In a regular inflationary environment this is always the case unless there is a severe credit quality issue.
If this is the case then anytime you can forecast the yield curve to show when the Fed will be lowering rates you can jump on it and go long bonds, typically with little risk. At the same time whenever you see rates being lowered you can wait a while and then go long stocks.
Neither of these relationships works perfect every time so it is important to still use risk controls. In fact if you had gone long stocks in 2008 when they lowered rates you would have lost a lot of money, but more often then not this trade and the concept behind it work well. Look at the yield curve, learn from it, and apply it to your market forecasting toolbox. - 23221
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 @ 3:47 AM
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