Bond yields for forex traders: what's the link?

FTC Community TeamStaff17 Sept 202613 views

You'll hear traders say "watch the 10-year yield" as if it's obvious. Yields reflect where interest rates are heading, and when one country's yields rise relative to another's, its currency often follows.

whether you watch bond yields at all
which yield matters for your pairs
the simplest explanation of the yield-currency link you've heard

The bond yields and exchange rates guide connects the two markets.

Bond yields for forex traders: what's the link? — pip movement diagram — How a pip moves the exchange rate

Bond yields for forex traders: what's the link? — central bank rate path diagram — A central bank's policy rate path across recent meetings

Background: Bond yields and exchange rates: why currency traders watch the 2-year yield

Currencies often follow the gap between two countries' government bond yields. How yield differentials work, why 2-year yields track central bank expectations, and when the link breaks down.

Why do currency traders watch bond yields?

Because money tends to flow toward higher returns. The gap between two countries' bond yields, especially 2-year yields that track central bank expectations, often moves in line with their exchange rate.

What is a yield differential?

The difference between the yields on comparable government bonds in two countries, such as US and German 2-year bonds. A gap widening in one country's favour tends to support its currency.

Read the full guide

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