Interest Rates and the Bond Market

I read an article recently on how little the average investor knows about bonds. It was shocking to see the stats on how little people understand the impact of interest rates and compound interest. After thinking about it, it made sense as people are never really taught these basic concepts in school as they relate to and impact their individual lives. For the average investor, bonds can certainly be intimidating. My world is trading and markets. This is where I am very comfortable and extremely confident, but I completely understand that my world can be very intimidating and troubling for those who are not directly involved in trading and markets. In this piece I want to help simplify the powerful and important Bond markets for you and focus on three reasons why you may want to pay a little more attention to them.

Bond Markets

Bonds are a fantastic trading and investing vehicle. You can trade the bond market through multiple channels, including Futures, ETFs and more. The major Bond markets, such as the 10 and 30 Year in the USA and the Bund and Bobl in Europe, are some of the highest volume and most liquid markets on earth which makes for very clean levels and great trading, if you know what you’re looking for.

Interest Rates

Are interest rates a part of your life? Have you ever borrowed money for a home or car? Do you have money invested in bonds? If so, how would you like to have the ability to forecast where interest rates are going in advance with a very high degree of accuracy? This can have an enormous impact on your life when it comes to finances. These Bond markets are the free markets for interest rates, this is where interest rates come from. For those who don’t know, when Bond prices go up, interest rates come down. When Bond prices come down, interest rates go up. This is where rates are determined. So, in the chart above, by knowing where the real supply and demand is (where banks are buying and selling bonds), we can time the change in interest rates and predict direction with a very high degree of accuracy. As the chart above suggests, there is key supply above and no significant demand until much further below which suggests higher interest rates are likely in the near future. This is key information for someone with an adjustable rate mortgage or someone seeking a high rate of return from bonds. For investors, we would look at supply and demand levels in the larger time frames. This is one of the things we do in the Extended Learning Track (XLT).

Odds Enhancer

Most people are aware of the relationship with the Stock and Bond market. Most people think that when Stocks are going higher, Bond prices are going lower and vice versa. This is true some of the time but certainly not always. There are plenty of times where these markets are moving in the same direction. When trading the stock market or the Index Futures, the Bond market can often help increase our odds of success. The rule we use in our XLT – live trading rooms is as follows: When the S&P, for example, is nearing a demand level, check to see if the Bond market is nearing a supply level. If it is, the S&P now becomes a higher odds buying opportunity. In other words, when both the Stock and Bond market are reaching opposing supply and demand levels at the same time, the odds of prices turning at those levels is very high. This of course assumes that you are quantifying supply and demand properly.

The more you understand how money is really made and lost in the financial system, the more financially stable you’re likely to be. The markets are simply a transfer of accounts from those who don’t know what they’re doing into the accounts of those who do. Hopefully, the experience in my world can help make your world, your life, a little easier and better.

Have a great day.

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