The US Treasury is buying back more long-dated bonds until 4 November. Do you watch long-bond yields when you trade currencies?

FTC Community TeamStaff19 Sept 20265 views

According to the Bank for International Settlements, 10-year government bond yields rose by 31 basis points in the United States, 34 in Germany, 27 in Japan and 24 in the United Kingdom over its latest review period, and 30-year yields reached multi-decade highs in many countries. The BIS puts part of that down to a higher term premium, meaning the compensation investors require to hold longer-term bonds.

The US Treasury is buying back more long-dated bonds until 4 November. Do you watch long-bond yields when you trade currencies? — pip movement diagram — How a pip moves the exchange rate

On 19 August the US Treasury announced that it would double the maximum size of its long-end buybacks from $2 billion to at least $4 billion per operation, from 9 September to 4 November. The BIS says the reaction was modest and short-lived: 30-year and 20-year yields fell around 10 basis points and the 10-year nearly 6, and much of that was reversed (full report).

Currency traders often look at the 2-year yield because it tracks expected policy rates (bond yields and exchange rates). Long yields tell a different story, about inflation risk, supply and the fiscal outlook.

The US Treasury is buying back more long-dated bonds until 4 November. Do you watch long-bond yields when you trade currencies? — central bank rate path diagram — A central bank's policy rate path across recent meetings

Questions for members:

Do you watch the 10-year or 30-year yield alongside the 2-year, or is the short end enough for your trading?
Have you seen a move in long yields lead a currency move, follow it, or do nothing?
How do you separate a rise in yields driven by rate expectations from one driven by the term premium?
Where do you check yields, and how often?

Please share your own experience and reasoning. Posts that promise a direction or sell signals will be removed.

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

Comments

Loading comments…