Day Trading & Forex Forum

Trader J

Hi,

My name is John (Trader J). I am an Investor and Commodities Trader and do not have any formal back ground in Economics. Is there perhaps someone with more knowledge that can explain the following to me:
attached is a T-Notes 10 year chart with continuous back adjusted Monthly data since 1985.
My question is about the relationship between the interest rates and yield curve. When seeing this chart, how do I interpret this relationship?
The way I understood it is that there is an inverse relationship between the two: if the bond price goes up, interest rate goes down. But in this case, as the chart shows, it only has gone up?
In other words, if one knows that there is a higher probability that price will go up and therefore interest rates over time will go down, why get a fixed rate mortgage?

Your help in understanding this is appreciated.

Trader J

Attached Files

T-Notes 10 yr.pdf (26.4 KB, 29 views)

Rhody Trader

First, a little correction. "Yield curve" is a term used to describe the comparisson of yields among the different maturities. As such it is not the term you should be using here.

That aside, your understanding is correct that higher note/bond prices mean lower yields. It's basic math. If your periodic interest payment is $100, then your yield will be higher if the prices is $800 (100/800=12.5% yield) than it's $1000 (100/1000 = 10% yield).

As for Note prices always going up and thus yields down, While that certainly has been the overall trend as depicted by the chart A) you can see periods where that has reversed or at worst gone nowhere for long periods, and B) You're chart doesn't include the period from the 1950s to the early 1980s, which would show a quite different story.

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Author - The Essentials of Trading

Martinghoul

First problem is that you're looking at a time series of futures prices. It's somewhat more complicated to extract a consistent yield out of futures prices.

Secondly, I have a bit of a problem reading your price chart. Does it truly suggest that the t-note futures in 1986-87 were trading with a 20 handle?

Thirdly, your instincts are sorta correct. In a very grand scheme of things, the US bond mkt has been experiencing a secular bull phase for the last 20 years, ever since the hyperinflation of the 70s and the Volcker response. 10yr yields have gone from arnd 12% in the 80s to 3% - 4% now. If you actually want to look at a times series of 10yr bond yields, I'd recommend the official Fed H.15 data that you can find here: http://www.federalreserve.gov/Releases/H15/data.htm

Finally, as to your question about where rates go over time, it's not quite as clear as that. If you look at the data I pointed you to and go back a little further, you'll find that 10yr yields have gone from arnd 4% in the early 60s to 14% in the early 80s and are now back at arnd 4%. So it's not like they can only go down. Which period are we likely to experience next, the 70s/80s or the 90s/00s? That's the bazillion $ question...

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MrGecko

As MG points out, looks like your "adjusted" futures prices are out of whack, first guess would be they have been discounted incorrectly, something along the lines of all prices being for Jun '10 delivery rather than the nearest Qtrly contract.

Also, try the tickers $TNX (10), $TYX (30) and $FVX (5) by the CBOE for "on the run" note yields. Google/Yahoo should have 'em.

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Trader J

Thank you for your interesting contributions. I looked at the data as suggested - see thumbnails -both charts are from Yahoo. It looks like it confirms what I have been thinking and doing - Interest rates were in a down trend for many years. It made a huge difference in my Real Estate investments.

But now the question arises: how does one protect oneself against the upcoming inflation and (possible) rising interest rates?

Attached Thumbnails

   

Martinghoul

And that is the bazillion $$$ question...

__________________
"Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."

Rhody Trader

Borrow now to lock in the low rates and to be able to pay that loan back with cheaper money in the future.

__________________
John Forman
Author - The Essentials of Trading

Trader J

Does anybody have ideas about Swaps? or Options? Or hedging? in this regard?