Changes in interest rates can give rise to arbitrage opportunities that, while short-lived, can be very lucrative for traders who capitalize on them.
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- Interest-Rate Carry Trades | FXCM Team - FXCM Markets
- What Are Interest-Rate Carry Trades?
- Strategies
Investors following a buy-and-hold strategy can encounter circumstances that might compel them to sell a bond prior to maturity for the following reasons:. Using bonds to invest for total return, or a combination of capital appreciation growth and income, requires a more active trading strategy and a view on the direction of the economy and interest rates.
Total return investors want to buy a bond when its price is low and sell it when the price has risen, rather than holding the bond to maturity. Bond prices fall when interest rates are rising, usually as the economy accelerates. They typically rise when interest rates fall, usually when the Federal Reserve is trying to stimulate economic growth after a recession. Within different sectors of the bond market, differences in supply and demand can create short-term trading opportunities.
Various futures, options and derivatives can also be used to implement different market views or to hedge the risk in different bond investments. Investors should take care to understand the cost and risks of these strategies before committing funds. Some bond funds have total return as their investment objective, offering investors the opportunity to benefit from bond market movements while leaving the day-to-day investment decisions to professional portfolio managers.
Many investors use callable securities within a total return strategy—with a focus on capital gains as well as income—as opposed to a buy and hold strategy focused on income and preservation of principal.
Interest-Rate Carry Trades | FXCM Team - FXCM Markets
Owners of callable securities are expressing the implicit view that yields will remain relatively stable, enabling the investor to capture the yield spread over noncallable securities of similar duration. If an investor has the view that rates may well be volatile in either direction over the near term but are likely to remain in a definable range over the next year, an investment in callable securities can significantly enhance returns.
Premium callables may be used when the bullish investor believes that rates are unlikely to fall very far. Discount callables are a better choice when the investor believes volatility will be low but prefers more protection in an environment of rising interest rates. If you are in a high tax bracket, you may want to reduce your taxable interest income to keep more of what you earn. The interest on U. Municipal securities offer interest that is exempt from federal income tax, and, in some cases, state and local tax as well.
Ladders, barbells and bullets can all be implemented with municipal securities for a tax-advantaged approach best achieved outside of a qualified, tax-deferred retirement or college savings account.
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Buying municipals in a tax-deferred account is like wearing a belt and suspenders. Bond swapping is another way to achieve a tax-related goal for investors who are holding a bond that has declined in value since purchase but have taxable capital gains from other investments. He or she then purchases another bond with maturity, price and coupon similar to the one sold, thus reestablishing the position. Investors who want to achieve automatic diversification of their bond investments for less than it would cost to construct a portfolio of individual bonds can consider investing in bond mutual funds, unit investment trusts or exchange-traded funds.
These vehicles each have specific investment objectives and characteristics to match individual needs. To learn more, see Bonds and Bond Funds.
What Are Interest-Rate Carry Trades?
A tax loss is not the only reason to swap a bond. Investors can also swap to improve credit quality, increase yield or improve call protection. Remember to factor the sell and buy transaction costs into your estimations of return. Trading emini's implies that you are just watching 1 outline, a similar graph, each day, all day every day. The blog and data is excellent and informative as well best forex signals. As progressed, and especially as QE3 developed later in the year, I became convinced that a short position in Eurodollars would be lucrative a position that gains from increasing interest rates for a couple of reasons: 1 I think that there is too much pessimism about the unemployment rate, and that the decreasing labor force participation rate is much less cyclical than seems to be widely believed.
It is mostly a demographic and cultural shift, so that continuing falling unemployment won't need to push against a headwind of a recovering labor force participation rate. This isn't necessarily good for our typical measures of economic output, but it would lead to interest rates increasing to more normal levels more readily. The Fed continues to have to readjust their unemployment rate forecasts down, even as their other indicators flounder, so I believe that I have been more or less right about this.
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The year end fiscal deal that included tax increases and a continuation of extended unemployment benefits probably pushed against both my inflation and my unemployment forecasts. In addition, I suspect that there was a kind of negative maturity premium in effect in the term structure of interest rates, due to uncertainty about the Fed's balance sheet, which was pushing rates in the futures range below the pure expectations rates.
Strategies
In any case, I did eventually get my sharp kick up in interest rates. In addition to my forecast, I felt like I had a fairly tight window of expected losses in the Eurodollars futures market. As it happened, rates on the Eurodollar contracts fell to as low as 1. As long as there was some expectation of short term rates eventually rising, that seemed about as low as you'd need to worry about on a short contract.
So, I wanted a trading strategy that only needed to handle maybe 50 basis points of potential losses, and was poised for a quick pulse of a substantial rate increase. Following is a chart with several trading strategies, and their performance over the past 10 months.
Labels: "Don't worry honey - I have a system. When the shorter-term MA crosses above the longer-term MA, it's a buy signal, as it indicates that the trend is shifting up. This is known as a "golden cross. On the other hand, when the shorter-term MA crosses below the longer-term MA, it's a sell signal, as it indicates that the trend is shifting down. Carry trade is a type of forex trading whereby traders look to profit by taking advantage of interest rate differentials between countries. It is important to note that while popular, it can, however, be risky. This strategy works because currencies bought and held overnight will pay a trader the interbank interest rate of the country of which the currency was bought.
A trader using this strategy wants to profit from the difference between the rates, which can be substantial depending on the amount of leverage used. Carry trade is one of the most popular trading strategies in the forex market, but this trading style can be risky; these trades are often highly leveraged and can be overcrowded. They also use the information to try to get a view on how its value is likely to move relative to another currency in future.
Fundamental analysis can be complex, involving the many elements of a country's economic data that can indicate future trade and investment trends. It can be simplified by concentrating on a few major indicators.
Trend trading is another popular and common forex trading strategy. The technique involves identifying an upward or downward trend in a currency price movement and then choosing trade entry and exit points. These points are based on the positioning of the currency's price within the trend, as well as the trend's relative strength. Trend traders use many different tools to evaluate trends, such as moving averages, relative strength indicators, volume measurements, directional indices and stochastics. Range trading is a simple and popular strategy based on the idea that prices often hold within a steady and predictable range for a given period of time.
Range traders rely on being able to frequently buy and sell at predictable highs and lows of resistance and support, sometimes repeatedly over one or more trading sessions. Range traders may use some of the same tools as trend traders to identify opportune trade entry and exit levels, including the relative strength index, the commodity channel index and stochastics.