Trading in bonds and other types of securities in Phoenix, AZ, can sometimes feel like obscure wizardry with rules that don’t quite make sense. However, the reality is, trading of any kind can be enormously complex, and the changes to the market environment while, on the surface, unpredictable, maybe even indecipherable, actually have many different factors affecting them.
That’s why traders in the Delta Trading Group should always be willing to sit down and do homework. Knowledge is power when it comes to trading, and the more you know, the better able you will be to make informed, strategic decisions that can yield a profit. Interest rates are one of those areas where people focused on bonds and securities should make sure they are informed.
Interest Rate Fluctuations
For people interested in trading stock index, interest rate, or currency futures, the interest rate—here defined as the interest rate set by the US Treasury—is the barometer that must be closely watched. How the interest rate moves determine what kind of market climate traders in these three areas will find themselves in. If interest rates are going to rise, for example, then it may be best to avoid long term interest futures.
The Curve Matters
For most traders, this means paying attention to the Treasury Yield Curve, which can show for selected intervals what the interest rates have been like. This curve moves up or down based on many different factors affecting the US economy, such as inflation, or boom periods of rapid expansion. And this can affect both short term and long term interest rates, though the movements of these rates tend to parallel each other to a degree.
The Elements Of The Curve
The Treasury Yield Curve is guided by three basic elements:
Nominal Interest Rates
This is a combination of anticipated interest rates with inflation entering the equation. It’s important to remember that inflation affects future coupon dollars and principal repayments.
Short-Term Interest Rates
The Treasury can make quick, short term adjustments to interest rates when they need to. The Federal Funds Rate, for example, is something that can be “deployed” for just one day, overnight, to affect the immediate, current interest rate and economic environment.
Supply & Demand
The Federal Open Market Committee, or FOMC, can directly intervene in the supply and demand of bonds, and this is reflected in the curve. When required, they can manipulate the economic environment with a bond-buying program, and they may do this to change the current performance rate of the economy.
The supply of bonds and other securities is affected by the demand and its ties to inflation. While there are a great many factors that traders in Phoenix, AZ need to keep in mind when trading bonds and similar financial instruments, the more traders are willing to work with the tools and the data available, the more likely it is that investment decisions are going to yield a good return. Or, at the very least, the warning signs of a loss may be intercepted earlier, and help mitigate or offset that loss.