This is not a prediction. It's meant to be educational but it's an analysis.
Loads of traders are unaware of what the Bond markets mean. This post can't be a full exploration as it's a massive topic. Some self-driven independent study is required. I'll give a few snippets of what I understand in the form of a story.
The Bond Market (aka Treasuries) is the truly big one. It dwarfs the stock markets. The Bond Markets have reliably heralded what's likely to happen in the economy. This where the really big money is, and people put their money for very short periods, long periods or 30 or more years. A Bond is a loan. You lend your money. Somebody owes you money and interest. But you can sell a Bond, which the debt owed to you. Someone can buy off the debt owed to you if they think it's a good deal that you're offering. That depends on a whole load of things.
Now the Bond market is important because the big one is US Govt Treasuries. You lend money to the Govt over various periods and you expect a 'Yield' which is similar to interest. At the end of the term - unless you sell the Bond on - you expect to get your money back in full from thuh Govt (plus the 'interest' over the years of the term).
The trouble at the moment in the Bond Market is that the 30Y and 10Y bond yields are definitely rising. Last year, people were worried about Yield curve inversion, where long term bond yields fell low and followed short term yields bonds. Between about Aug 2019 and Feb 2020 long term yields were below the 2Y yield. That was crazy cuz it meant that putting your money with the Govt for longer was not much better than with a short term loan to the Govt. That happened when 'everything' went south and people thought the economy was gonna go bust.
Now something different is happening. Look at it. 30Y and 10Y yields have rocked north leaving behind the 2Y. What does that mean? The Yields on the 30Y and 10Y are important because it means that the US Govt have to offer a higher interest rate to attract the big money.
When good times are expected, bond prices fall as demand falls because people want to put their money in shorter term investments, where they think they can make more money, more quickly. Fewer people want to lend to the govt i.e. no pressing need for the best secure investments. They wanna take risks to make more! This is how it works - right? Well, this is probably not you - but the big money can take on risks better than you can. As a result the government has to pay a higher yield (interest rate) to attract investors, cuz they wanna go elsewhere. Higher yields therefore signify that sentiment in economic outlook is better. You should be punching the air - but not so fast.
Here's the problem. Bond yields set the stage for higher interest rates on loans elsewhere (- needs reading up). This is very simplified so may not be 100%, but it's broadly true. There are all sorts of issues like short-term interest rates and long term rates (they don't go hand in hand). But overall the Bond Market is the one to signal what's coming, in broad brush.
Who likes higher interest rates? Well, those with cash, in the minority- who want to lend to the have-nots, and squeeze the juice out of them. 😮😂 Who doesn't like higher interest rates? The people who have borrowed or will borrow money and have to pay back; in a majority. 😨😢
I've left out rates of rises of various Yield curves and an essay on Yield-curve inversions of different types. The important thing is to get more educated about all stuff related to Bonds.
Is hyper-inflation coming? I don't know. If you believe the FED, the answer might be 'no'. It's a big separate topic.
Okay- this is complicated stuff. I've left out about 20 things related to Bonds and Interest rates. What does it mean for you as a trader? Well you won't really get the full big picture if you just read this post. But the big picture is your business if you're trading on a 4H to 1D time frame in any market. If you're a short term trader in stocks or forex the tension is mounting in the backdrop with rising volatility which can take you out in the 5 min to 1h time frames when you least expect it.
If you think my broad understanding is incorrect. Do let me know and share with others so we can all learn. I always dare to be wrong. Let's have that discussion.
Stay safe. Mind your stop-losses. Don't burn good cash. Okayyy? 😉👍
Loads of traders are unaware of what the Bond markets mean. This post can't be a full exploration as it's a massive topic. Some self-driven independent study is required. I'll give a few snippets of what I understand in the form of a story.
The Bond Market (aka Treasuries) is the truly big one. It dwarfs the stock markets. The Bond Markets have reliably heralded what's likely to happen in the economy. This where the really big money is, and people put their money for very short periods, long periods or 30 or more years. A Bond is a loan. You lend your money. Somebody owes you money and interest. But you can sell a Bond, which the debt owed to you. Someone can buy off the debt owed to you if they think it's a good deal that you're offering. That depends on a whole load of things.
Now the Bond market is important because the big one is US Govt Treasuries. You lend money to the Govt over various periods and you expect a 'Yield' which is similar to interest. At the end of the term - unless you sell the Bond on - you expect to get your money back in full from thuh Govt (plus the 'interest' over the years of the term).
The trouble at the moment in the Bond Market is that the 30Y and 10Y bond yields are definitely rising. Last year, people were worried about Yield curve inversion, where long term bond yields fell low and followed short term yields bonds. Between about Aug 2019 and Feb 2020 long term yields were below the 2Y yield. That was crazy cuz it meant that putting your money with the Govt for longer was not much better than with a short term loan to the Govt. That happened when 'everything' went south and people thought the economy was gonna go bust.
Now something different is happening. Look at it. 30Y and 10Y yields have rocked north leaving behind the 2Y. What does that mean? The Yields on the 30Y and 10Y are important because it means that the US Govt have to offer a higher interest rate to attract the big money.
When good times are expected, bond prices fall as demand falls because people want to put their money in shorter term investments, where they think they can make more money, more quickly. Fewer people want to lend to the govt i.e. no pressing need for the best secure investments. They wanna take risks to make more! This is how it works - right? Well, this is probably not you - but the big money can take on risks better than you can. As a result the government has to pay a higher yield (interest rate) to attract investors, cuz they wanna go elsewhere. Higher yields therefore signify that sentiment in economic outlook is better. You should be punching the air - but not so fast.
Here's the problem. Bond yields set the stage for higher interest rates on loans elsewhere (- needs reading up). This is very simplified so may not be 100%, but it's broadly true. There are all sorts of issues like short-term interest rates and long term rates (they don't go hand in hand). But overall the Bond Market is the one to signal what's coming, in broad brush.
Who likes higher interest rates? Well, those with cash, in the minority- who want to lend to the have-nots, and squeeze the juice out of them. 😮😂 Who doesn't like higher interest rates? The people who have borrowed or will borrow money and have to pay back; in a majority. 😨😢
I've left out rates of rises of various Yield curves and an essay on Yield-curve inversions of different types. The important thing is to get more educated about all stuff related to Bonds.
Is hyper-inflation coming? I don't know. If you believe the FED, the answer might be 'no'. It's a big separate topic.
Okay- this is complicated stuff. I've left out about 20 things related to Bonds and Interest rates. What does it mean for you as a trader? Well you won't really get the full big picture if you just read this post. But the big picture is your business if you're trading on a 4H to 1D time frame in any market. If you're a short term trader in stocks or forex the tension is mounting in the backdrop with rising volatility which can take you out in the 5 min to 1h time frames when you least expect it.
If you think my broad understanding is incorrect. Do let me know and share with others so we can all learn. I always dare to be wrong. Let's have that discussion.
Stay safe. Mind your stop-losses. Don't burn good cash. Okayyy? 😉👍
Comment:
This article is interesting. www.bloomberg.com/ne...us-case-spike-a-risk
All of this below is speculative and may not reliable for investment purposes. This is not advice!
Basically the FED with its endless supply of money was purchased bonds. What that means is that the FED was lending money to the Govt. Purchase of a bond means you lend the money and you are owed the money. What beats me, is that if 'you' have an endless supply of money, what's the point of lending the Govt or anybody money? Do you really need it back? Why not say - "It's fine - I have so much. I can print up some more anytime. You just keep it - okayyyy?" 🤣
I have to say that it is objectively weird for any entity with an endless supply of money to be lending anybody money (as per bond purchases). That sounds like a 'fudge' to me (not the sweet edible kind).
I know the theory and real world issues that excessive QE eventually leads to weakening of a currency and inflation. In one sense the FED could get away with it for a while because there has been a deflationary spiral going on as well.
So here's the thing. With Bond Yields being rising, which means that few real people want bonds, the FED purchases of bonds creates a demand for Bonds that isn't truly there in an open market. What are they trying to do? Flatten the recent spike in Bond yields by creating an artificial demand? How long could that last? Theoretically - forever - cuz they have endless purchasing power.
What's the Govt doing with the money deposited with the Govt (via bond purchases)? It seems reasonable to think that a portion of that is going into Fiscal stimulus. If I'm correct on that, it means to the main driver of the so-called economic recovery is quite probably mainly 'Monetary Stimulus'.
So if my assessment is correct, it means there is a bubble being blown up - againnnn! Do you get it?
If somebody shocks a dying or just dead animal hard enough - in an attempt to bring it back to life, it will jump. If you had endless shocks and electricity, you could do that a whole lot of times. But that effect can't last forever - and you can't just bring back something to life by shocking it over and over.
Maybe I'm confused, but all the stimulus needs something to have traction on. So some think that the Dow Jones Transportation Index (DJT) which has been neck and neck with the DJI means a great deal. After all you might be inclined to think, that if their is a lot of movement of goods then that's a good sign of traction. Well no - there hasn't been a movement of stuff that matches the rise of the DJT. The DJT is just a bunch of 20 transportation stocks. The index is subject to the shocks of monetary and fiscal stimulus like any other stock index. Its rise does not mean that those transportation stocks are really worth what's being paid for them. The value in a stock should be about what the company is actually doing in generating GDP. When you look at the rocketing price of transportation stocks, ask yourself, 'Are they really doing stuff?'
Okay so back to bonds - the whole thing is connected up. Dig deep. Right the FED seems to be fighting a yield curve in order to control the effect it might have on interest rates i.e. buying bonds might lower the jump in yields by creating a 'false' demand, hence lowering yields - which then puts pressure on interest rates to stay just below the magical 2% and avoid over heating. In doing all that stuff stocks have benefitted cuz the big money prefers to take risks on equities instead of tying up money for years in bonds. Oh BTW - this might explain in part why Gold has been struggling. In other words money that might have gone into Bonds is has probably flowing in to things that are charging north. Like? Equities and Bitcoin! The Big Boys go where the big push is - and they're not afraid of risk like me. 😉😂
All of this below is speculative and may not reliable for investment purposes. This is not advice!
Basically the FED with its endless supply of money was purchased bonds. What that means is that the FED was lending money to the Govt. Purchase of a bond means you lend the money and you are owed the money. What beats me, is that if 'you' have an endless supply of money, what's the point of lending the Govt or anybody money? Do you really need it back? Why not say - "It's fine - I have so much. I can print up some more anytime. You just keep it - okayyyy?" 🤣
I have to say that it is objectively weird for any entity with an endless supply of money to be lending anybody money (as per bond purchases). That sounds like a 'fudge' to me (not the sweet edible kind).
I know the theory and real world issues that excessive QE eventually leads to weakening of a currency and inflation. In one sense the FED could get away with it for a while because there has been a deflationary spiral going on as well.
So here's the thing. With Bond Yields being rising, which means that few real people want bonds, the FED purchases of bonds creates a demand for Bonds that isn't truly there in an open market. What are they trying to do? Flatten the recent spike in Bond yields by creating an artificial demand? How long could that last? Theoretically - forever - cuz they have endless purchasing power.
What's the Govt doing with the money deposited with the Govt (via bond purchases)? It seems reasonable to think that a portion of that is going into Fiscal stimulus. If I'm correct on that, it means to the main driver of the so-called economic recovery is quite probably mainly 'Monetary Stimulus'.
So if my assessment is correct, it means there is a bubble being blown up - againnnn! Do you get it?
If somebody shocks a dying or just dead animal hard enough - in an attempt to bring it back to life, it will jump. If you had endless shocks and electricity, you could do that a whole lot of times. But that effect can't last forever - and you can't just bring back something to life by shocking it over and over.
Maybe I'm confused, but all the stimulus needs something to have traction on. So some think that the Dow Jones Transportation Index (DJT) which has been neck and neck with the DJI means a great deal. After all you might be inclined to think, that if their is a lot of movement of goods then that's a good sign of traction. Well no - there hasn't been a movement of stuff that matches the rise of the DJT. The DJT is just a bunch of 20 transportation stocks. The index is subject to the shocks of monetary and fiscal stimulus like any other stock index. Its rise does not mean that those transportation stocks are really worth what's being paid for them. The value in a stock should be about what the company is actually doing in generating GDP. When you look at the rocketing price of transportation stocks, ask yourself, 'Are they really doing stuff?'
Okay so back to bonds - the whole thing is connected up. Dig deep. Right the FED seems to be fighting a yield curve in order to control the effect it might have on interest rates i.e. buying bonds might lower the jump in yields by creating a 'false' demand, hence lowering yields - which then puts pressure on interest rates to stay just below the magical 2% and avoid over heating. In doing all that stuff stocks have benefitted cuz the big money prefers to take risks on equities instead of tying up money for years in bonds. Oh BTW - this might explain in part why Gold has been struggling. In other words money that might have gone into Bonds is has probably flowing in to things that are charging north. Like? Equities and Bitcoin! The Big Boys go where the big push is - and they're not afraid of risk like me. 😉😂
Comment:
Troubled times! www.bloomberg.com/ne...-lost-faith-in-bonds
Comment:
There is a cup and handle formation in the 30Y bond yield curve. Some see it. Some don't. It may mean something or it may mean nothing. Sorry - TA and chart formations cannot tell the future.
FED balance sheet 42% of GDP @ 2020-01-26. Does money have value anymore? [Different perspective on the virus youtu.be/NjTdvALChwk ]
I've only skimmed the surface and used much rough-and-ready language to get the big picture across. I did not go big time into definitions - as it would take forever.
Also start at this and many related links: www.investopedia.com...rms/b/bond-yield.asp