A few years ago I built a new house. Initially, I thought you get some plans together, hire a contractor, and live happily ever after. Boy was I mistaken… It didn’t take me long to realize I was on a journey into a world I knew little about. Between permits I didn’t know how to get, architect plans I didn’t understand, and costs I had no real idea how to evaluate or compare, it was mistake after mistake for me. I know what all you architects and builders are saying, “What a novice,” and you’re correct but that’s because this is your world not mine. My world is trading and markets. This is where I am very comfortable and extremely confident but I completely understand that unless you are directly involved in trading and markets, my world can be very intimidating and troubling for the average person. One market specifically that most people are involved in yet understand the least is the Bond/Treasury market. In this piece, I want to help simplify the powerful and important Bond markets for you and focus on three reasons why you may want to pay a little more attention to them.
Bonds are a fantastic trading and investing vehicle. You can trade the bond market through multiple channels including Futures, ETF’s, Futures, and more. The major Bond markets such as the 10 and 30 Year in the USA and the Bund and Bobl in Europe are some of the highest volume and most liquid markets on earth which makes for very clean levels and great trading, if you know what you’re looking for.
30 Year Bond Chart – Weekly
Are interest rates a part of your life? Do you ever borrow money for a home or car? Do you have money invested in interest bonds? If so, how would you like to have the ability to forecast where interest rates are going in advance with a very high degree of accuracy? This can have an enormous impact on your life when it comes to finances. These Bond markets are the free markets for interest rates, this is where interest rates come from. For those who don’t know, when Bond prices go up, interest rates come down. When Bond prices come down, interest rates go up. This is where rates are determined. So, in the weekly chart above, by knowing where the real supply and demand is, we can time the change in interest rates and predict direction with a very high degree of accuracy. As the chart above suggests, there is key supply above and no significant demand until much further below. This is key information for someone with an adjustable rate mortgage or someone seeking a high rate of return from bonds. For investors, we would look at supply and demand levels in the larger time frames. This is one of the things we do in the Extended Learning Track (XLT).
Most people are aware of the relationship with the Stock and Bond market. Most people think that when Stocks are going higher, Bond prices are going lower and vise versa. This is true some of the time but certainly not always. There are plenty of times where these markets are moving in the same direction. When trading the stock market or the Index Futures, the Bond market can often help increase our odds of success. The rule we use in the XLT is as follows: When the S&P for example is nearing a demand level, check to see if the Bond market is nearing a supply level. If it is, the S&P now becomes a higher odds buying opportunity. In other words, when both the Stock and Bond market are reaching opposing supply and demand levels at the same time, the odds of prices turning at those levels are very high. This of course assumes that you are quantifying supply and demand properly.
In the past couple months, I have learned quite a bit about building a house. For example, I learned that when it comes to pricing out the next project whether I understand it or not, just say “no” to the bid and the price always comes down. I am getting smarter but still have a ways to go. As for trading and Bonds, hopefully, the experience in my world can help make your world, your life, a little easier and better.
Have a great day.