Bond
Instruments
Concepts
- Treasury Note(T-Note) is a goverment-issued debt instrument witha maturity between 1 and 10 years.
- Yield: Annual return
Core Bond Trading Logic
Interest Rate Trading
Bond Prices move inversely to interest rates. - Long Bond bet on falling rates - Short Bond bet on rising rates - Yield Curve Trades: steepener trade, Flattener trade Yield refers to the annualized return an investor earns from holding a bond.
Credit Spread Trading
Arbitrage
Why Bond Price Rise When Interest Rates Fall
The inverse relationship between bond prices and interest rates is a fundamental principle of fixed-income markets. Bonds pay fixed coupons, if new bonds are issued at lower rates, older bonds with higher coupons become more valuable. Investores bid up the price of the older bond until its yield matches the new market rate. Bond price will rise until its return lowered to later low rate.
China responds by selling another $50BN in TSY (treasuries)
How to decide the Newly issued rate
The government doesn't arbitrarily set the rate in a vacuum. The yield on a newly issued bond is aligned with the prevailing market yield for similar maturities. Typically at the nearest 1/8th of a percent (5%-5.125%).
Bond yield drop close reflects economic stress
lower yields often signal slower growth, some worry China might sell UST bonds to maintain its currency's value against the dollar, as it need enough dollars to keep the peg stable.
Why China reduce USD purchases would raise US interest rates
The interest rates mean bond yield.
A lower 10Y bond signals monetary paralysis, and worse, a potential deflationary spiral
Lower bond yield means high demand low supply, and economic pessimism with weak economic growth, low inflation or even deflation. They are willing to accept tiny returns. a liquidity trap, where low rates fail to spur borrowing and investment because businesses and consumers expect prices to fall, so they hoard cash instead. Peg constraints means PBOC can't aggressively cut rates to stimulate the economy if US Federal Reserve is raising rates. A wider interest rate gap would encourge capital outflows from China, weaking the yuan and forcing the PBOC to burn through USD reserves to defend the peg. Deflationary Spiral: is a vicious cycle falling price--lower production--debt burden grows--more deflation.
What is FX peg
FX peg is a monetary policy where a contry fixes its currency's exchange rate to anoyther currency (or a basket of currencies) and maintains that rate within a narrow band. The goal is to stabilize the value of the domestic curreycn, reduce exchage rate volatility, and provide predictability for trade and investment.
What is Peg Panic Zone
If China starts selling T to defend the Yuan peg, we enter the Peg Panic Zone.