GLOBAL BOND MARKETS
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THEMES AFFECTING Bonds
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Bonds as related to other asset classes
Bond prices and yields often drive price movements in currencies and other asset classes. In this section, we aim to explain how these movements are analyzed and traded by our dedicated contributors and in-house analysts.
A bond yield is the return an investor gets on a bond. Contrary to many other assets, bond prices and bond yields are inversely related. When the price of a bond increases, the yield decreases. When the price of a bond decreases, the yield increases. Thus, a so-called rally in the bond market means that yields decreased, while a bond sell-off means that yields increased.
It is important to know the underlying dynamic of why a bond's yield is rising or falling. This movement can be based on interest rate expectations or market sentiment, such as uncertainty, which triggers a ‘flight to safety’ to bonds, traditionally considered less risky compared to stocks.
The change in interest rates, either the target rate or market rates, is important because it makes stocks or bonds become more attractive. When this happens, prices tend to trend as money flows from one vehicle to the other until the new relationship is adequately reflected in prices.
Bonds and stocks are in constant competition for investor money, and less so commodities. These, particularly Gold, usually trend in the opposite direction of bond prices (falling commodity prices usually lead to higher bond prices, and vice versa). Therefore, commodities generally trend in the same direction as interest rates.
US Treasuries
If you trade USD-based or USD-quoted currency pairs, it is crucial to monitor the United States (US) bond market, as movements in Treasury yields impact the US Dollar. Treasury yields’ movements are often driven by comments from Federal Reserve (Fed) officials, so staying updated on news coming from US monetary authorities is essential. US stocks usually get a boost from rising bond prices (falling Treasury yields), especially in inflationary periods. But if they don't, then it's worth looking for market sentiment and identifying reasons for the cautious stance in bond markets. US stock prices can also rise alongside falling bond prices (rising Treasury yields) during deflationary periods. In such cases, both stock prices and interest rates rise, driving global demand for the US Dollar.
UK Gilts
Global bond prices tend to move in synchrony, but occasionally, a country's bond market may experience sharper movements compared to others. Sometimes this volatility is related to currency fluctuations. The Gilt, the 10-year benchmark in the United Kingdom (UK) fixed-income market, typically has a positive correlation to the Pound Sterling (GBP). A decoupling between these markets can serve as an early alert that an intermarket relationship has shifted. Changes in foreign exchange prices can overwhelm relative return calculations for international investors buying Gilts. Stripping out the currency component, UK Gilts should still provide returns to investors. Otherwise, other bond markets such as US Treasuries, may become attractive. Additionally, a prolonged trend in rising energy prices is a factor to consider as it will affect inflation expectations and therefore the Bank of England's (BOE) monetary policy.
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Editors' picks
EUR/USD bounces off lows, back to 1.1560
EUR/USD manages to pick up some pace and rebounds from earlier lows, revisiting the 1.1560 region on Friday, giving back part of Thursday’s ECB-driven rally. Meanwhile, the US Dollar trades with marked gains, supported by a cautious tone across global markets and persistent geopolitical tensions.
GBP/USD meets support around 1.3300
GBP/USD retreats on Friday, surrendering part of Thursday’s strong advance and dropping to as low as the 1.3300 region. The US Dollar draws support from the softer risk tone, making it harder for Cable to hold its ground as investors digest the latest developments around the Middle East crisis.
USD/JPY bounces alongside USD, retakes 158.00
USD/JPY is rebounding alongside the US Dollar in Friday's Asian trading, retaking 158.00 after having dropped 1.25% on Thursday, in a session dominated by broad Yen strength. The pair had rallied to within a few pips of the 160.00 level earlier in the week before reversing sharply, and Thursday's large bearish candle erased most of the gains accumulated over the prior five sessions.
Gold resumes the decline, challenging $4,600
The bearish tone in Gold remains well in place for yet another day on Friday, with prices of the troy ounce of the yellow metal threatening once again the $4,600 mark. The precious metal’s decline comes on the back of persistent tensions in the Middle East, rising US Treasury yields and a firmer Greenback.
WTI price corrects after failing to return above $100
West Texas Intermediate (WTI) trade over 1% lower to near $93.10 during the early European trading session. The oil price faces selling pressures as multiple events relating to Middle East conflicts, such as Israel’s pledge to refrain attacking Iranian oil infrastructure and potential talks on removal of sanctions on Iran’s oil stuck in the sea, have eased oil supply concerns.