Bonds and how they influence Forex.

I have a vague undertanding of Bonds. I know their yields are a good indicator of investor sentiment and as a result are a powerful tool of reference for traders. However I remain hazy in my understanding of what influences Bond prices and yields, and in turn how differences in Bond prices and yields affect forex; are there any experienced traders that can give a good explanation?

Am I right in saying that yields drop and prices rise when risk aversion is high, putting (safer) Treasuries in higher demand and vice versa?

Any help would be greatly appreciated

Price movement in the bond markets are linked with interest rates. When interest rates rise bond price falls and when interest rates go down bond prices go higher. The relationship between bond prices and yield is an inverse relationship.

What does this mean in terms of trading FX? Well the simplistic approach would be to listen for key phrases such as 'flight to quality' or 'flight to safety'. When you hear these phrases you would be looking for money to be flowing out of equities and into the bond market. A bond is basically a sophisticated IOU so when confidence is shaken money flows towards government treasuries.

What does this all mean when it comes to looking for trades from an FX perspective? When there is a flight to safety/quality you would be looking for dollar strength.

[quote=Monaco;1634710]Price movement in the bond markets are linked with interest rates. When interest rates rise bond price falls and when interest rates go down bond prices go higher. The relationship between bond prices and yield is an inverse relationship.

Thank you for your insight. Could you or anyone explain to me more fully the relationship between interest rates and Bond prices? I would have thought that Bond prices would increase with the higher demand for treasuries due to increased interest rates.

short term bond prices change on future rate speculation, don't they?

here is some nice article written appeared in investopedia.org
Bond Spreads: A Leading Indicator For Forex

http://www.investopedia.com/articles.../05/041305.asp

[quote=Pipmaster85;1640013
Thank you for your insight. Could you or anyone explain to me more fully the relationship between interest rates and Bond prices? I would have thought that Bond prices would increase with the higher demand for treasuries due to increased interest rates.[/quote]


If interest rates are 5% and a bond is paying for example 7% then the bond is very attractive to the investor. However if interest rates increase to 8% then the 7% no longer looks good. So to adjust for this the price of the bond falls which makes the yield rise thus making the yield more competitive.