Bond Market and Currency Prices
Currency is the basic ingredient of all economic activities. Both retail stores, contractors, military, mortgage borrowers, and even gangsters. They all evaluate their economic plans in terms of currency. As a result, the world of foreign exchange covers all other fields of financial activity including bonds, commodities, and the stock market.
Most forex traders have a basic conception of the relationship between forex and the stock market. Then the resulting currency flows cause the value of the currency pair to fluctuate simultaneously. Similarly, commodity market trends. This has an easy impact shown on short-term commodity currency fluctuations, and the impact is slightly less clear to others. The same dynamic, which causes this market to affect currency quotes. Also ensure that fluctuations in the bond market strongly influence the dynamics of the short-term, long-term foreign exchange market. But there are also certain specific aspects of the bond market that we will try to examine in this article.
The bond market is very large because it reached a size of around 10.7 trillion dollars in December 2008. Needless to say, bonds are not issued by government entities alone. like cities, corporations, and many other types of institutions. They regularly publish their own paper to benefit from this vast and liquid market. Actors in the US treasury and corporate bond markets are small individual savers to foreign governments. The amount is very large to spend, and the impact of all types of economic development is felt in the bond market every day.
Investors bond and what we can learn from the level of corporate bonds
The bond market is for buyers of corporate bonds. The goal is to benefit from the various results options available. Besides that bonds control risk exposure through bond ratings and the maturity period of the paper purchased.
Because bond investors are always higher in the payment structure in the event of default or bankruptcy. Many investors and traders choose to buy bonds instead of stocks to achieve a favorable balance between risk and yield.
Bonds of a company
Buying bonds of a company allows us to benefit from the company’s growth while taking minimal risks. But at the same time minimize our control of loaned capital. Because bond investors don’t say how company management uses loan funds. The significance of the corporate bond market is more limited to retail forex traders than the bond market. On the other hand, because the level of corporate bonds is a strong indicator of perceived risk in the market in general.
The government bond market is even more important for forex traders
The role of the bond market
The role of the government bond market is different in several respects. First of all, we must remember that as long as the government has the legal right to print money, it is not in danger of neglecting its obligations. If there are risk-free investments everywhere, it is clear that government bonds are the most credible candidates.
Second, because government bonds will almost certainly be paid on time, they function as a general benchmark for all types of investments measured. The success or failure of a professional money manager is not measured in the absolute value of dollar profits or losses. But it is compared with the yield on financial bonds from a comparable period of time.
This method is useful because it allows us to evaluate the risk / reward ratio of an investment in a much more constructive way.
Forex and bonds.
If holding a three-month government bond we can achieve a greater return. Certainly bigger than what is offered by our forex manager.
Third, the government bond market funds government spending. Thus, fluctuations in this market have far greater significance for currency values. Because changes directly affect the credibility of government policies, and the sustainability of their deficits. And finally, because bond yields are very dependent on inflation, and inflation is closely related to growth. The yield structure of the government bond market provides a very strong early warning system for predicting periods of boom and bust.
The bond market has short and long-term implications on currency trends
Forex traders with some experience will quickly recognize the intra-day relationship between yield treasury bond yields, stock prices, and currency values.
This is not surprising because in many cases currency fluctuations represent the movements of foreign investors. That is between bonds and shares when the event takes place. In addition, a strong relationship between inflation expectations and bond yields makes government bond yields. This is a very useful indicator to evaluate the world financial opinion about the success or failure of the US Federal Reserve in controlling inflation. Because inflation is an important component for determining currency value equations, and the availability of important data so that the financial market becomes clear.
Even though there were many discordant and angry voices, it was only temporary. Developments in the bond market have important long-term implications for currency trends as well. As an important component of financial accounts, external flows into bonds have a direct role. Its role is certainly in building long-term currency trends. The fact that the US dollar still hasn’t collapsed despite the massive expenditure and loans of the US government. That explains that healthy finance in the US still continues, at least on the surface picture of the US financial market.