How to measure a Bond's demand and its local currency? | Forex Factory

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How to measure a Bond's demand and its local currency?

  • #1
  • First Post: Jan 18, 2018 1:45pm Jan 18, 2018 1:45pm
My Understanding is that if a demand for a bond is goes up, people convert to local currency to buy the bond. So price of the currency goes up as well.

But how exactly do we measure that the demand for a bond is going up, because a bond yield's and bond's price are inversely co-related.

Does the increase in bond's price indicate an increase in a bond's demand

(or)

Does the increase in a bond's yield indicate an increase in bond's demand?

If my understanding is wrong, please feel free to correct me...

Thanks
  • #2
  • Jan 18, 2018 4:55pm Jan 18, 2018 4:55pm
Quoting aaven
My Understanding is that if a demand for a bond is goes up, people convert to local currency to buy the bond. So price of the currency goes up as well. But how exactly do we measure that the demand for a bond is going up, because a bond yield's and bond's price are inversely co-related. Does the increase in bond's price indicate an increase in a bond's demand (or) Does the increase in a bond's yield indicate an increase in bond's demand? If my understanding is wrong, please feel free to correct me... Thanks
Bond prices and bond yields are inversely correlated.
If demand for bond increases, bond yields falls & bond prices increase.

The relationship with currencies however, is not so straightforward. It can vary with the business cyces. Sometimes they are positively correlated, othertimes they move in opposite directions.
Government bond yields are good way to guage the market expectation of future interest rate.
I look for value wherever it can be found
  • #3
  • Jan 18, 2018 8:01pm Jan 18, 2018 8:01pm
Quote
if a demand for a bond goes up, people convert to local currency to buy the bond.

Correct and this will result in the yields going down. This will also increase the value of that currency, because more people would be buying that currency to buy those bonds.

When the world markets are looking for safe heavens, example after 2008, bonds dropped every where. The market loses and volatility created fear, scaring your investors looking for safe places to place their money.

Quote
Does the increase in bond's price indicate an increase in a bond's demand

No its the opposite. Bonds increase in price, is from a low demand. The increase in price is to entice more buyers.

(or)

Quote
Does the increase in a bond's yield indicate an increase in bond's demand?

The bonds price and bonds yield are essentially the same thing.


Example if you buy a 100$ bond, that bond will cost the same no matter what, 100$. Its the yield that will change. The yield on the bond is the issuers responsibility, at no extra cost to the purchaser.

Now as for what banks do, is they will sell and buy bond yields just like currency. The reasoning is because bonds have less volatility, and hold their values much longer. Banks do this to hold the value of the company in bonds to secure their "vaults". Also that's why its easy to become a bond dealer, your essentially offering people free money. But of course then we get into inflation and such. But I know thats not your reasoning for this thread. You would like to know how to gauge a government bonds demand.

This ties in with the following:

Monetary policy
Economic Growth
Country Tax rates
Job Growth
Natural Resources
Economic Stability
GDP
CPI
etc etc etc

All of these aspects can be very in-depth subjects, each to their own. Bonds are a leading indicator for the foreign exchange markets, sadly your average trader does not realize this.

IF you haven't already done so, please check out this thread. https://www.forexfactory.com/showthread.php?t=570673.

It shows the empirical evidence tying 3 month bond yields to monetary policy, with the correlation bonds provide for foreshadowing the forex market.
Learn, a forex trader must, unlearn and relearn he will.
  • #4
  • Jan 20, 2018 7:09am Jan 20, 2018 7:09am
Quoting COGSx86
{quote} Correct and this will result in the yields going down. This will also increase the value of that currency, because more people would be buying that currency to buy those bonds. When the world markets are looking for safe heavens, example after 2008, bonds dropped every where. The market loses and volatility created fear, scaring your investors looking for safe places to place their money. {quote} No its the opposite. Bonds increase in price, is from a low demand. The increase in price is to entice more buyers. (or) {quote} The bonds price...
COGSX86,

Thanks for putting in the effort to give your inputs.

Could you please help me clearing the confusion:

You mentioned that demand for bonds goes up, yields go down.

Also,

"Bonds increase in price, is from a low demand."

If low demand causes Bond Prices to rise, that means Low Demand causes Bond Yields to fall.

So conversely High Demand cause Bond Yields to rise? Which is in conflict with above point.

Apologize for the noob questions, just trying to wrap my head around it...

Thanks
  • #5
  • Jan 20, 2018 7:10am Jan 20, 2018 7:10am
Quoting COGSx86
{quote} Correct and this will result in the yields going down. This will also increase the value of that currency, because more people would be buying that currency to buy those bonds. When the world markets are looking for safe heavens, example after 2008, bonds dropped every where. The market loses and volatility created fear, scaring your investors looking for safe places to place their money. {quote} No its the opposite. Bonds increase in price, is from a low demand. The increase in price is to entice more buyers. (or) {quote} The bonds price...
I will definitely check your thread, one of the reasons why i am getting the primer on bonds...
  • #6
  • Jan 20, 2018 7:11am Jan 20, 2018 7:11am
Quoting synicz
{quote} Bond prices and bond yields are inversely correlated. If demand for bond increases, bond yields falls & bond prices increase. The relationship with currencies however, is not so straightforward. It can vary with the business cyces. Sometimes they are positively correlated, othertimes they move in opposite directions. Government bond yields are good way to guage the market expectation of future interest rate.
Thanks Synicz for the reply...
  • #7
  • Jan 20, 2018 7:51am Jan 20, 2018 7:51am
Quoting aaven
{quote} COGSX86, Thanks for putting in the effort to give your inputs. Could you please help me clearing the confusion: You mentioned that demand for bonds goes up, yields go down. Also, "Bonds increase in price, is from a low demand." If low demand causes Bond Prices to rise, that means Low Demand causes Bond Yields to fall. So conversely High Demand cause Bond Yields to rise? Which is in conflict with above point. Apologize for the noob questions, just trying to wrap my head around it... Thanks
I'm at phone now so quick replz

higher demand -> bond price rises -> yield goes down
"Men Who Can Both Be Right & Sit Tight Are Uncommon" ~ Jesse Livermore
  • #8
  • Jan 23, 2018 10:26pm Jan 23, 2018 10:26pm
Quoting michisuperfr
{quote} I'm at phone now so quick replz higher demand -> bond price rises -> yield goes down
Thanks a Lot Michi...

One follow up question though,

If yields are high, it should give more profits isn't it? Why increase in yields is not used as an indicator for high demand of bonds?

Thanks
  • #9
  • Jan 23, 2018 10:45pm Jan 23, 2018 10:45pm
Quoting aaven
{quote} Thanks a Lot Michi... One follow up question though, If yields are high, it should give more profits isn't it? Why increase in yields is not used as an indicator for high demand of bonds? Thanks
This is due to the structure of bonds. Bonds typically pay out a "coupon rate". Instead of a fixed percentage. The coupon rate doesnt change, the price of bond does.
Thus lets say you are buying a bond paying out $10 annually. You paid $1000 for it. The yield then is 10/1000 = 0.01 or 1%

Now imagine somebody offers to buy your bond for $1200, remember that the coupon rate doesnt change. Thus the yield for this bond is now 10/1200 = 0.00833 or 0.833%. The price of the bond has increased or the yield has dropped.

Obviously this is an oversimplified explanation.

Thus an increase in yields actually shows that there is a decrease in demand for the bond.
I look for value wherever it can be found
  • #10
  • Jan 27, 2018 8:48am Jan 27, 2018 8:48am
Quoting synicz
{quote} This is due to the structure of bonds. Bonds typically pay out a "coupon rate". Instead of a fixed percentage. The coupon rate doesnt change, the price of bond does. Thus lets say you are buying a bond paying out $10 annually. You paid $1000 for it. The yield then is 10/1000 = 0.01 or 1% Now imagine somebody offers to buy your bond for $1200, remember that the coupon rate doesnt change. Thus the yield for this bond is now 10/1200 = 0.00833 or 0.833%. The price of the bond has increased or the yield has dropped. Obviously this is an oversimplified...
Thanks a lot Synicz for explaining with an example...

Just to confirm my understanding, the below link is the price of US-2 Year T-Note as reference. If we look at monthly candles, it is currently going down.

If it keeps going down, it is safe to assume USD will keep becoming weak?

https://in.investing.com/rates-bonds/us-2-yr-t-note
  • #11
  • Jan 27, 2018 1:19pm Jan 27, 2018 1:19pm
In general yes. But this is subjected to other factors. And the relarionship is not so straightforward.
I look for value wherever it can be found
  • #12
  • Last Post: Jan 28, 2018 12:22pm Jan 28, 2018 12:22pm
Quoting synicz
In general yes. But this is subjected to other factors. And the relarionship is not so straightforward.
Thank You Synicz...
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