The Bond Market is the Truth
The bond market is the truth. So goes the old saying. It is also very helpful. Bond traders are often looking ahead and signs of stress in markets often appear in the bond markets first. If bond and equity markets disagree, then the general rule of thumb is this, go with the bond market.
The recent stress in the GBP
The bond market was also very helpful in recent trade on the GBP. When the UK announced the mini-budget the UK gilt market showed signs of stress. How? Well, when bond yields rise for negative reasons that is a bond market showing distress. In fact, around the time that Rishi Sunak and Liz Truss were in hustings the end market on Liz Truss’s comments on changing the BoE mandate. How that was a sign of things to come!
So, the bond market in distress sent the GBP sharply lower. However, on Monday October 17 Jeremy Hunt announced the reversal of the previous chancellor’s fiscal plan. What do we make of it? The approach was to look at the bond market. The verdict from the UK gilt (market) was this – reassured. So, this gave confidence for some short-term GBPUSD longs on a break higher towards the next pivot zone. See below.
Now, this situation with the GBP and the bond market was unique in the sense that usually rising yields are normally positive for a currency. However, when yields rise because of ‘distress’ it isn’t. However, the main point to take away is that the reaction of the bond market was very helpful. Here is one other market to watch – the US bond market. If US bond yields start falling sharply then, in the current market environment, many investors will expect US stocks to rise alongside USD weakness. So, keep an eye on US treasury yields falling on any hints of slowing Fed policy for a potential pop higher in the S&P500.
About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.
*Any opinions made in this material are personal to the author and do not reflect the opinions of HYCM. This material is considered a marketing communication and should not be construed as containing investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. HYCM does not take into account your personal investment objectives or financial situation. HYCM makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of HYCM, a third party, or otherwise. Without the approval of HYCM, reproduction or redistribution of this information isn’t permitted.