Intraday trading on Wednesday saw a Bond market rally based on Fed Chair Janet Yellen’s comments indicating we’re close to the “neutral rate”. During a neutral rate economy, fluctuations in the Fed’s benchmark rate neither bolster nor restrict the economy.
Various economic conditions tend to have different impacts on both the stocks and bonds markets. Historically, changes in interest rates impact bond prices via the discount rate. As inflation is on the rise, interest rates tend to follow suite, which bumps the discount rate and decreases the price of a bond. Conversely, as interest rates decline, the bond yield or discount rate moves in tandem triggering an increase in bond price.
The above chart showcases a 15 minute U.S. Treasury Bond Futures Contract (ZB) for July 12th. Based on the bond/interest rate relationship, one can easily identify the market reaction as Yellen’s comments were released and digested by market participants.
While certain economic principles have a history of convergence & divergence when particular conditions are met, the market does not always react in unison. Therefore, the use of proper stops and targets combined with appropriate risk mitigation, is necessary when trading during economic news events and times of increased volatility. Remember, past performance is not indicative of future results.
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