Front-end rates: how are you reading the short end?
The short end of the yield curve prices the next few central bank meetings, and its moves are the market's fastest read on policy expectations.
How do you track it?
- the instruments or rates you watch
- what the front end is pricing now, in your read
- how it reaches your pairs
Background: bond yields and exchange rates.
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.
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