The Yield Curve and the Global Macro Investor
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.
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.
On the other hand if we have an inverted yield curve, where it slopes from the upper left to the lower bottom then banks will not lend as they are borrowing money at more expensive prices then they can loan it out for. This obviously curtails the credit markets and slams a break down on the economy. When this happens the Fed inevitably has to come in and lower rates to bring things back in line and help the economy grow again.
Bonds and rates are like a piece of wood straddled on a log. If you sit at one end the other end goes up. If bonds are at one end yields are at the other. When yields go down bonds go up and vice versa. This is almost always the case, especially in an inflation environment.
So anytime that you see either of these events happen the global macro investor can start to look for an entry point to either buy or to sell bonds and stocks. If the curve is inverted then you will likely want to start buying bonds and selling stocks as the act of lowering rates will cause bonds to go up. After bonds have gone up and it looks like the Fed is done lowering rates it is worthwhile to look at stocks as the next beneficiary of the rate cuts as businesses can now borrow cheaper and therefore expand faster.
Of course as with all things in the market nothing works every time. In fact the quote history never repeats itself, but it often rhymes is a very appropriate statement. Used along with proper risk controls the yield curve can become one of the global macro investors best timing tools and economic gauges. - 23212
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.
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.
On the other hand if we have an inverted yield curve, where it slopes from the upper left to the lower bottom then banks will not lend as they are borrowing money at more expensive prices then they can loan it out for. This obviously curtails the credit markets and slams a break down on the economy. When this happens the Fed inevitably has to come in and lower rates to bring things back in line and help the economy grow again.
Bonds and rates are like a piece of wood straddled on a log. If you sit at one end the other end goes up. If bonds are at one end yields are at the other. When yields go down bonds go up and vice versa. This is almost always the case, especially in an inflation environment.
So anytime that you see either of these events happen the global macro investor can start to look for an entry point to either buy or to sell bonds and stocks. If the curve is inverted then you will likely want to start buying bonds and selling stocks as the act of lowering rates will cause bonds to go up. After bonds have gone up and it looks like the Fed is done lowering rates it is worthwhile to look at stocks as the next beneficiary of the rate cuts as businesses can now borrow cheaper and therefore expand faster.
Of course as with all things in the market nothing works every time. In fact the quote history never repeats itself, but it often rhymes is a very appropriate statement. Used along with proper risk controls the yield curve can become one of the global macro investors best timing tools and economic gauges. - 23212
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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