Currency market: Bonds vs yields, yield spreads and the currency price

A currency price and currency pair is arranged as either a yield or bond and represents the currency price connection to interest rates. USD as DXY, USD/JPY, USD/CAD and USD/CHF trade by the US bond price. This is what it means as safety of the USD currency.  Non USD pairs such as EUR/USD, GBP/USD, AUD/USD and NZD/USD are connected and trade by yields.

The overall connection is Bond Vs Yield. Both are reflections of the same financial instrument except for different numbers. As Bond prices trade higher then yields fall. As Yields rise then bond prices fall.

A yield is considered a risk asset compared to the safety of the bond. Safety of the bond means holders of the bond will be paid no matter what happens as bonds are guaranteed by governments.

Notice the 2008 crash. USD currencies skyrocketed higher. What traded higher was the bond price. Non USD currencies fell as a result of  falling yields. Exclude the extreme crash example, the same situation trades today and every market trading day only on a much smaller scale.

Notice the yield lineup and expansion by the 1 year yield. Also note all yields from the 3 month to 30 year all trade just below vital averages. Early warming to big moves ahead  as the opposite bond price is also at vital levels. The lineup is constructive to yield spreads.

3 month 1.05, 0.9201.

1 year 2.12, 2.07.

2 year 2.64.

3 Year = 2.87.

5 year = 2.93, 2.94.

7 year = 2.97, 3.01.

10 year = 2.9450, 3.0135.

20 year = 3.33, 3.47.

30 year = 3.12, 3.13.

The overall yield curve now runs 2.66 as opposed to 2.73 from yesterday's view from 2 year to 30. Yesterday's 66 point to possible mobements is today 65 and no difference. Possible ranges and movements hold constant as yields against a +97 correlation move together as one unit.

Trading ranges expand for every higher yield. The 20 and 30 year yields trade wider ranges than the 2 year. The purpose to assign yield numbers is to hold the entire yield curve constant as one unit.

The 10 year yield dropped to 2.78 yesterday then rose to 2.91 and just prior to vital levels at 2.94 and 3.01. The overall path traded from 2.91 to 2.78 then higher to 2.91 again. EUR/USD dropped to 1.0464 then higher to 1.0606. The 10 year yield rise from 2.78 to 2.91 and completed in 12 hours while EUR/USD traded from 1.0464 to 1.0606 in 12 hours.

Same rise story to GBP/USD, AUD/USD, NZD/USD but the opposite story to USD/JPY, USD/CAD and USD/CHF.

USD/CHF likewise fell from 0.9865 to 0.9694, USD/JPY from 128.94 to 127.02, DXY from 103.88 to 102.66, USD/CAD 1.2858 to 1.2781.

Bond vs yield relationship

The 10 year bond price from 2.84 traded a range from 2.83 to 2.87, the yield from 2.78 to 2.91 and a 4 to 13 point relationship. Yields are mispositioned to the bond price and this is the point where markets will see its greatest moves as yields must reposition lower. The misposition is seen in spreads.

The 3 leaders of the entire market trading bloc yesterday was DXY, bonds  and yields.

Yield spreads

Note the long end 20 to 30 and 21 point spread, 10 to 20 at 38 points, while the 7 year is mispositioned to the 10 and 5 year yield. The 3 to 5 year holds a 6 point spread and 23 points to 2 vs 3 year. Market volatility and price paths is seen from the lower end of the yield curve.

Correct is higher yields hold wider ranges, shorter at the low end and the longer end is the driver to market prices. A market price starts small then rises higher and wider ranges as the price rises up the yield curve.

Short EUR/USD is automatically understood as short yields or long EUR/USD as yields rise but also note currency pairs are arranged as opposites. EUR/USD = Yield/ Bond, USD/JPY = Bond/Yield,

DV01

DV01 answers what is the dollar value of a basis point. As highlighted in Inside the Currency Market 11 years ago, DV01 is the average absolute price change of  Treasury securities to a 1 basis point increase ore decrease in yield to maturity.

The formula: Change is absoluite value with 1 basis point/ divide by change in absolute value with 1 basis point./ 2.

Seen and factored is the bond price yield relationship and used daily to trade bonds and yields.