Every financial market in existence has some impact on every other market. The mere movement of money around the various markets either allow for more investment in a particular market, or keep money out of those markets. Either way, they matter, and the same is true for the bond market.

A bond is an “IOU” issued by an entity that needs to raise money for some purpose or another. Investors buy those bonds on the promise of being paid back at a later date with interest.

Bonds are paid back to investors on a set schedule and for a set interest rate.

The bond yield refers to the percentage that the bond holder is paid for their investment. The bond price is the amount that the bond holder paid to own the bond in the first place. Both figures are important to understand because they both contribute to the true value of that bond in the long run.

Bond prices and bond yields are inversely correlated. When bond prices rise, bond yields fall and vice-versa.

Here is a simple graph to make it easier to picture:

Another way to look at it is like a seesaw:

The way that you can use this information for currency trading is by paying attention the bond yields offered by the bonds of any given country. Believe it or not, the bond yields offered by the bonds of a specific country are very likely to indicate the strength of that country’s economy and its stock market. Thus, it is important to pay attention to the bond yields offered by a country’s bonds to try to figure out where that country’s stock market might be headed.

Essentially, government bond yields act as a guide to the general direction of the country’s interest rates and expectations.

The 10-year Treasury note is a key measure of the US dollar strength. When its yield rises, it signals bullishness for the dollar. Conversely, when its yield falls, it indicates bearishness for the dollar.

Therefore, it’s important to understand why the bond’s yield is increasing or decreasing. This could be due to changing interest rate expectations or it could be the result of investors shifting their money from riskier investments such as stocks into safer ones like bonds. This is known as a “flight to safety” and can have an impact on the yield of the 10-year Treasury note. Understanding these underlying dynamics helps investors prepare for changes in the US dollar.

Also, demand for bonds tends to increase when investors are worried about the state of the stock market in their domestic markets. Thus, a rising interest in the purchase of bonds in a specific country may indicate that the country’s stock market is not likely to do well in the near future. In that event, it might be wise to consider making some plays against the currency of that country.

In other words, it might be wise to short the native currency of a country that is experiencing rising interest in purchasing bonds.

Remember, when using this as a potential strategy, always try to pair a strong currency against a weak one. In other words, if you want to short the US Dollar, try to find the strongest currency that you can pair it up against to buy the strong currency and short the dollar. That is one of the best ways to capitalize on the information that you have obtained from the bond markets.