using bonds in intermarket analysis


jack

Administrator
Staff member
You guys have done a great job at sorting this out.. I was going to jump in and add how it's important to make sure how the bonds chart you are looking at is printed (their value vs their yield, which is probably the most confusing part) but you guys already have that covered. :)

The only thing I can add is on the USDX comments.. correlations or not, USDX == DX contracts on ICE, and thus, it's good to know what actually makes up DX:

https://www.theice.com/productguide/ProductSpec.shtml?specId=194

And specifically, the weighting of the USD vs the following currencies and weighted within DX as such:

Euro (EUR), 57.6% weight
Japanese yen (JPY) 13.6% weight
Pound sterling (GBP), 11.9% weight
Canadian dollar (CAD), 9.1% weight
Swedish krona (SEK), 4.2% weight and
Swiss franc (CHF) 3.6% weight

So it's VERY Euro weighted... this is mostly since the DX first came about in the 70's and back then the Euro was all different currencies and the weighting was far more spread out between each pair.) Not to mention that Asia, while still important, wasn't as large of a trading partner to the US back then as it is now.

SO... (US)DX up == Dollar up, and the rest down... thus, people are running for safety to the all mighty dollar. (But it could also mean they are running into USD from overseas trades in order to BUY US bonds that yield well. Think about it: An institution in Germany has to convert their Euros into USD first, before they can purchase USD based bond, thus giving upward pressure to both USD and bonds at the same time. So your own analysis on why USD is increasing in value has to come into play. It's not always perfectly linked as straight risk on vs risk off.)

Hope that helps. :)
 

slugFX

Well-Known Member
Now I am just getting confused. Based on the Trading Plan Development Series by ICT it says that Cable & Fiber should follow the yields. ICT also tweeted today about how influential the yields were on today's price action, but the yields have clearly turned down recently and Cable & Fiber shot straight up.

Here you can see the US 2 year, 5 year, & 10 year yields:


Tansen says that stockcharts.com is positively correlated with USDX, but my stock charts looks exactly like my Bloomberg yield charts:


And then we have the actual bond price which I have in all my ICT notes that should be positively correlated with the USDX and clearly was not today:


I just need to get all this shit straightened out, it is so frustrating :-[
 

jack

Administrator
Staff member
FMOC and Bubble Ben did some news today. Money shifted around drastically given his reassured commitment not to taper QE so soon. The move was drastic since everyone and their dog had positioned themselves to expect tapering.

EDIT: Keep in mind, this was a surprise move.The market not only expected tapering, but was placing their bets on 'how much' not 'if'. So when the tapering was postponed, we got a huge jolt across the board..

That puts cash flowing from USD into other assets, including bonds, which lowers yields (and that makes sense since QE continuing means interests rates aren't expected to rise as fast combined with the FED still buying bonds and notes like it's going out of style, and that makes bonds worth holding in the present.)

There's times when correlation works, and times when it breaks down.. usually when it breaks down there's some catalyst that sets things out of whack.. today you can thank Bubble Ben. :p


http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-331457/
 

Ramy3

May the pips be with you!
So if i understood this correctly, that is why one of my EAs got it’s « ass whooped » with the Euro hitting 1.35. Not cool. :twitch:
Was not really following this event...

Time for some new variables/settings.

Cheers!
 

jack

Administrator
Staff member
Ramy3 said:
So if i understood this correctly, that is why one of my EAs got it’s « ass whooped » with the Euro hitting 1.35. Not cool. :twitch:
Was not really following this event...

Time for some new variables/settings.

Cheers!
LOL, yup. Fed funds rate, FMOC meeting minutes and forward looking advisories, all packed in between 2-3pm EST. Gotta expect some volatility.. and Summers backing out of the future chair position there was a lot of unknowns in the air.

Don't get me wrong, I go out of my way to cut out as much narrative fallacy as I can.. but the Fed tends to cause some drastic moves so they are worth paying attention to (or at least worth flattening out before they are about to meddle about with policy or news.)

Did the EA pile in short to fade the move? Euro?
 

Ramy3

May the pips be with you!
I knew FMOC announcements moved the market. Totally forgot how much it can run it though. I trade till 12 ish, and the afternoons are new territory for me. A bit in the dark as to how they move and react. This particular EA trades these hours. It is in live forward testing after good long demo returns. Not off to a good start. Will be revisiting some of my settings. ie: No trades on FMOC days.

Jack said:
Did the EA pile in short to fade the move? Euro?
That’s about what happened with it.Just a tad bit to early, lol. With a bit more to it. :)
 

foreigner

Est. 12480 Hours and Counting
Conspiracy Time

Ive been banging on about strength in the bond prices recently and from what I can tell the 10yr t note certainly looks bullish.

However, after looking at the 30yr T note and rethinking the signs of strength, I am starting to see a different story, The main thing that drew my attention is the sharp drop in commercial net long position within what looks like a consolidation.

Given the recent rally in FX and what appears to be bullish divergence in the 10yr yield along with implied support in the dollar, could gdayfx be right when he says we are due an about turn?

Surely the Government wouldnt make the bonds look strong when they are about to take a dive, would they?! wink ;) wink ;)



As always draw your own conclusions.
 

Alpha-Bet

Well-Known Member
Re: Conspiracy Time

foreigner said:
Ive been banging on about strength in the bond prices recently and from what I can tell the 10yr t note certainly looks bullish.

However, after looking at the 30yr T note and rethinking the signs of strength, I am starting to see a different story, The main thing that drew my attention is the sharp drop in commercial net long position within what looks like a consolidation.

Given the recent rally in FX and what appears to be bullish divergence in the 10yr yield along with implied support in the dollar, could gdayfx be right when he says we are due an about turn?

Surely the Government wouldnt make the bonds look strong when they are about to take a dive, would they?! wink ;) wink ;)



As always draw your own conclusions.
US Bonds.. Hey China, how we traveling?
 
P

Piper

Guest
From the picture It seems like the yields are heading down,so its supposed to be weakness.Idon't get the S/R lines you draw there.
 

foreigner

Est. 12480 Hours and Counting
Piper said:
And down she goes ::)
Piper it doesnt work like that mate, the overall yield direction is of less consequence to us as the market can rally on declining yields due to a weaker dollar yield, its all relative.

Remember, we're looking at three things;

1. US bonds to give us long term direction.
2. Yield DIVERGENCE (not direction) to give us a medium term bias.
3. HTF Technical analysis to support the bias.

Its only when you put all three together that it becomes useful.

On a separate note, have you ever seen the film "hunt for red october"? ;)
 
P

Piper

Guest
foreigner said:
HI all, is this dollar strength or dollar weakness or could it be either?



I tried everything,but is till cant see where the euro and sterling lower then the dollar. :'( It's probably just me.Now a bit of forecast:if the pound won't brake the yellow low,then they'll probably jump up.

foreigner said:
..
Piper it doesnt work like that mate, the overall yield direction is of less consequence to us as the market can rally on declining yields due to a weaker dollar yield, its all relative.
..
Foreigner dude,maybe it doesn't.In the mean time,i'm trading what "doesn't work like that" instead of posting too zoomed in pictures of it,from what can't really see sh*t,with still pending answer about those weird red lines in it.But i think i've got along with it.

All relative?Yea this is that E=MC2.But
quantum physics are now debating the issue.

foreigner said:
..
Remember, we're looking at three things;

1. US bonds to give us long term direction.
2. Yield DIVERGENCE (not direction) to give us a medium term bias.
3. HTF Technical analysis to support the bias.
..

״Those who have the most toys will not win, but those who have the knowledge and can change their behavior to what is needed." -PoP

Best wishes in your trading,
Piper
 

jinirav75

Well-Known Member
Quotes from previous comments

1.The overall yield direction is of less consequence to us as the market can rally on declining yields due to a weaker dollar yield, its all relative.

2.There's times when correlation works, and times when it breaks down.. usually when it breaks down there's some catalyst that sets things out of whack

Question: Is this what happening the last few weeks?

Question: Is below the conclusion?

1. US bonds to give us long term direction.
2. Yield DIVERGENCE (not direction) to give us a medium term bias.
3. HTF Technical analysis to support the bias.

Question: Do we a better resource on the net for understanding the bond market? Thank you.
 

foreigner

Est. 12480 Hours and Counting
jinirav75 said:
Quotes from previous comments

1.The overall yield direction is of less consequence to us as the market can rally on declining yields due to a weaker dollar yield, its all relative.

2.There's times when correlation works, and times when it breaks down.. usually when it breaks down there's some catalyst that sets things out of whack

Question: Is this what happening the last few weeks?

Question: Is below the conclusion?

1. US bonds to give us long term direction.
2. Yield DIVERGENCE (not direction) to give us a medium term bias.
3. HTF Technical analysis to support the bias.

Question: Do we a better resource on the net for understanding the bond market? Thank you.
Yes that is a general conclusion to the hypothesis.

The accepted hard and fast rule is that when bonds go up yields go down, but everyone knows that right.

What everyone might not know is that divergence can indicate a break in the correlation.

This is when the dollar yield may become stronger or weaker than its counterparts. This is why fx can rally on bearish yield divergence.

Because of this there are actually no hard and fast rules. The skill, is in determining how the dollar is weighted relative to the other majors.

This type of analysis takes in to account many different factors which is why its not a stand alone trading system, this is what takes practice, observation and skill.

And no, Im not aware of any other learning sources on the web, its a case of rolling your sleeves up and getting stuck in to some testing.

Hope that helps
F
 

jack

Administrator
Staff member
Hey guys, let's keep the remarks constructive and avoid condescending language.

We're all hear to learn and it's ok to disagree. :)
 
P

Piper

Guest
foreigner said:
..its all relative..
Ever heard of cross currency analysis or the SMT?..... :eek:

foreigner said:
Yes that is a general conclusion to the hypothesis.

..

The accepted hard and fast rule is that when bonds go up yields go down, but everyone knows that right.

What everyone might not know is that divergence can indicate a break in the correlation.
..
Genius like,so the yield and a face value of a bond doesn't necessary correlate? Since you are so keen to quote ICT(he's great) I will also give you a quote of his:Know the asset class!!...

From now on i will refrain to giving responses to your posts.

Cheers,
Piper
 

jack

Administrator
Staff member
Ok, I'll try this again:

It's a lot easier for me to just delete posts than it is for me to edit them.

If you catch my drift.
 

jack

Administrator
Staff member
foreigner said:
What everyone might not know is that divergence can indicate a break in the correlation.
EDIT: This post only applies to the yield to price relationship of the same bond, such as the US 5 year to itself. foreigner was actually talking about yields between different bonds from different sources, such as US bonds compared to UK or German bonds. Which makes his context of 'divergence' different than what this post addressed.

Yes, however with bonds, the relationship between Yield and a bond's resale value is hard linked.

So unless the data you're viewing is skewed, when one goes up, the other goes down.

(EDIT: possible reasons why it might looks skewed include data vendors who chart a blend of contracts in financial futures, which is done so you can see years worth of price even though the individual contracts expire every 3 months or less and can deviate in value between each other... that or the chart is set to scale logarithmically and you have a very steep change in price on your hands.)

Put another way: Price, relative to the bond's par value (plus coupon rate), determines yield.

Consider the 30-90 day t-bills that are auctioned off each month: They don't pay a coupon rate (interest) at all (and not because interest rates are so low these days. ;) ) They are sold at a discount to their par value, and at maturity the par value is paid back.

For example, a $100,000 t-bill might be sold off for $99,850 to an institution, with the understanding that when the t-bill has matured and is cashed in, the owner gets $100,000. There is no set interest rate, but the owner gets the effective yield of the difference between the two prices (0.15% ROI , in this case, or ~1.8% annualized.)

So if something were to happen in the economy causing short term interest rates to shoot up (for the sake of example, a country has issues paying back their debts so the market won't take on the risk for such a little return.) ...and new $100,000 t-bills were being sold by the government in turn for only, say, $98,000, then you as the buyer would still be paid the full par value ($100,000) when the security matures, so paying less in this scenario increases the effective yield over the earlier example.
 

foreigner

Est. 12480 Hours and Counting
Jack said:
Yes, however with bonds, the relationship between Yield and a bond's resale value is hard linked.

So unless the data you're viewing is skewed, when one goes up, the other goes down.

(EDIT: possible reasons why it might looks skewed include data vendors who chart a blend of contracts in financial futures, which is done so you can see years worth of price even though the individual contracts expire every 3 months or less and can deviate in value between each other... that or the chart is set to scale logarithmically and you have a very steep change in price on your hands.)

Put another way: Price, relative to the bond's par value (plus coupon rate), determines yield.

Consider the 30-90 day t-bills that are auctioned off each month: They don't pay a coupon rate (interest) at all (and not because interest rates are so low these days. ;) ) They are sold at a discount to their par value, and at maturity the par value is paid back.

For example, a $100,000 t-bill might be sold off for $99,850 to an institution, with the understanding that when the t-bill has matured and is cashed in, the owner gets $100,000. There is no set interest rate, but the owner gets the effective yield of the difference between the two prices (0.15% ROI , in this case, or ~1.8% annualized.)

So if something were to happen in the economy causing short term interest rates to shoot up (for the sake of example, a country has issues paying back their debts so the market won't take on the risk for such a little return.) ...and new $100,000 t-bills were being sold by the government in turn for only, say, $98,000, then you as the buyer would still be paid the full par value ($100,000) when the security matures, so paying less in this scenario increases the effective yield over the earlier example.
Well thanks for quoting me out of context JACK and then sharing information that is of no use in yield analysis, your blinding in-depth knowledge is invaluable Im sure, have you appeared on DAILYFX lately?!

This information is of no consequence to yield analysis and I can guarantee traders dont give a hoot about it.

Im trying to give practical advice in yield analysis which I think Ive done.

If you can prove what Im saying is wrong then by all means go ahead, otherwise please refrain from dragging me in to your soap box moments.

If youve got something useful to say then we'd all love to hear it!?
 

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