The Yield Curve and the Global Macro Investor
There are many global macro investing strategies that make use of the yield curve. While primarily used to trade bonds, there are also several good uses for trading stocks and currencies as well. In fact as powerful as the yield curve is, there is likely a few yield curve strategies for every asset class out there.
So what is the Treasury yield curve? It is the curve you get when you plot out the yields on different maturities of Treasury securities. For instance if you take the ninety day Treasury bill, the two year Treasury bill, five year Treasury note, ten year Treasury bond, and the thirty year Treasury bond you will get a curve. Usually sloping upwards from the bottom left to the upper right of the plot area, it can also take several other shapes. It can be very inverted with the far right down at the bottom and the far left at the top, it can have seemingly random lumps, and it can shift anywhere on the plot area. Each of these shapes and slopes of the yield curve tell the global macro investor something differently about the economy and the different trading instruments available to you.
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 why does it work? Why does it matter what direction the yield curve is? Well if the yield curve is steep, going form the lower left to the upper right it means that banks are highly incentivized to lend money and therefore spur growth in the economy by helping businesses and individuals spend money on expansions as well as spending in general. This happens because when the curve is upwards sloping banks can borrow short term at low rates from the government and lend at higher rates for longer periods of time to the public.
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 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.
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.
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. - 23162
So what is the Treasury yield curve? It is the curve you get when you plot out the yields on different maturities of Treasury securities. For instance if you take the ninety day Treasury bill, the two year Treasury bill, five year Treasury note, ten year Treasury bond, and the thirty year Treasury bond you will get a curve. Usually sloping upwards from the bottom left to the upper right of the plot area, it can also take several other shapes. It can be very inverted with the far right down at the bottom and the far left at the top, it can have seemingly random lumps, and it can shift anywhere on the plot area. Each of these shapes and slopes of the yield curve tell the global macro investor something differently about the economy and the different trading instruments available to you.
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 why does it work? Why does it matter what direction the yield curve is? Well if the yield curve is steep, going form the lower left to the upper right it means that banks are highly incentivized to lend money and therefore spur growth in the economy by helping businesses and individuals spend money on expansions as well as spending in general. This happens because when the curve is upwards sloping banks can borrow short term at low rates from the government and lend at higher rates for longer periods of time to the public.
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 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.
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.
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. - 23162
About the Author:
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posted by X - Men @ 3:43 AM
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