|
U.S. TREASURY BONDS
The U.S. Treasury Bond market has arguably the greatest impact of any market on the general economy and is watched by
the world over. As bond prices fall, interest rates rise taking with them rates charged on credit cards, business
loans and mortgages. Meanwhile, as rates rise, general economic activity slows and unemployment rises. What happens
in the Treasury Bond market touches the lives in one way or another of almost every resident.
Treasury Bonds have always attracted trading interest both because their prices are volatile enough to provide trading
opportunities and because the market is liquid enough to absorb orders of any size - from one contract to 100 contracts or more.
Treasury Bonds and, more generally, U.S. government debt securities are held
by private and public organizations, hedge funds, pension plans, insurance companies and even domestic and international governments.
This wide investor base provides liquidity virtually around the clock and creates a fair and level playing field for all
participants. Regular sales of bonds by the U.S. government to fund operations keeps this market liquid and viable.
Understanding Bonds: Prices vs Yield
A bond represents nothing more than a stream of income: regular coupon payments and then the principal payment at bond maturity.
For example, a $100,000 30-year Treasury Bond having coupon 6% would pay to the holder interest income of $6,000 every year and
then $100,000 at maturity in 30 years. Treasury Bonds are backed by the financial credibility of the U.S. government
who guarantees that payments will be made.
Bonds are quoted in terms of $100 of face value. In the example above, if this Treasury Bond were trading exactly at 100, then a
buyer would receive 6% annually for 30 years. However, it is often the case that buyers demand a different rate of return.
If investors desire a higher rate of return, then the price of this Treasury Bond will trade at a price below 100, for example, at 97.
This has the effect of driving up the implied rate of return, also called the yield to maturity, to a value of say, 6.20% The bond's
price will continue to fall, and the yield to maturity will continue to rise, until investors are content to buy the bond.
On the other hand, if the bond's coupon seems very attractive, then investors may bid up the price of the bond say to 103.
This will lower the yield to maturity to say, 5.80% and subsequently reduce the demand for the bond.
In practice, it is rare that a bond trade exactly at par, that is, exactly at 100. This is because the rate of return that
investors demand often changes especially in
response to new information on the economy. Falling bond prices mean that interest rates corresponding to that bond are
rising while rising bond prices mean that interest rates are falling. In other words, bond prices and interest rates move in opposite directions.
Trading U.S. Treasury Bonds
While U.S. Treasury Bonds and shorter-dated Treasury Notes for that matter do trade in a cash secondary market, it is the futures
market that provides access to these assets for most investors. CME Group (which includes the former CBOT) is the futures
exchange on which futures contracts on Treasury Bonds and other U.S. Government securities are listed. Trading bonds means
buying and selling Treasury Bond futures. If you expect
long-term interest rates to rise (fall), then you might consider a strategy of selling (buying) Treasury Bond futures.
U.S. Treasury Bond prices are influenced by domestic economic data such as employment, income growth, and overall consumer and
industrial prices. Any data which supports expectations of rising inflation tends to weaken Treasury Bond prices
because inflation erodes the present value of the stream of income that the bond provides. You will almost always see
the bond market drop during a time of heightened inflationary concerns.
U.S. Treasury Bonds are also viewed as a safe-haven investment. Consequently, they often rally during times of international financial crises.
Investors, both domestically and internationally, value the credit guarantee of the U.S. government and this gives U.S. Treasury Bonds
great appeal when the credit quality of other borrowers - including other governments - falters. This has been the predominant reason
for the incredible rally in bond prices in the last half of 2008. More recently, U.S. Treasury Bonds have enjoyed another flight-to-quality
in 2010 in response to growing concerns over high government debt in many European countries.
To learn more about U.S. Treasury Bonds, please see the free resources at right and, if you wish to speak with someone about trading
U.S. Treasury Bonds, then please complete the "Talk to a commodities professional".
|
The U.S. Treasury Bond market rallied to historical highs in late 2008 as investors flocked to these safe-haven assets amid the global credit crisis,
bringing the yield on the 30-yr Treasury Bond to as low as 3%, something never before seen. Since then, prices have retreated, pushing long-term
yields higher, as credit-crunch fears have eased and investor's have returned aggressively to traditional assets such as equities.
More recently, U.S. Treasury Bond prices have resumed an upward trend again in response to flight-to-quality but this time prompted
by growing concerns over the size of government debt and debt servicing costs of many European countries.
Many investors believe that it is only a matter of time before the debt situation of the United States comes into the spotlight
at which time U.S. Treasury Bonds would likely be sold heavily. Moreover, some investors are also speculating that global inflation
may soon become a problem which would also lead to bond selling in general. Indeed, some nations like China are already seeing
unexpectedly high rates of inflation in mid 2010. Among other nations,
inflation could be sparked not by domestic growth but rather by their government's printing excess money to pay debt servicing costs.
These investors can find an easy trade in the futures and options market for U.S. Treasury Bonds: sell a futures
or buy a put option or bear put option spread.
But before you consider trading Treasury Bonds or indeed, any of the commodities, you must have a plan. Our Course called,
Commodity Trading as a Second IncomeTM will
explain the basics of the commodity markets and teach you a
trading plan, complete with case studies and actual trade examples, that is ideal for the beginner or anyone looking to trade
commodities as a second income.
You may also want to visit our specialty web site on buying commodity options
to learn more about option and option spread strategies that are appropriate for the beginner.
|