This month, we wanted to explore the topic of interest rates; what they are, why they are important, and how you can use interest rate information in your trading. This is a topic that new traders typically gloss over when starting out, so we hope this is a helpful and actionable series for new people looking to learn more about macroeconomics and fundamental analysis!
The first question when dealing with interest rates is how to see the information on TradingView. While you can always click the "Bonds" tab under "Markets" and navigate to the "Rates" table, an even easier way to view interest rates across the globe is by using the 'search' terminal and typing in "10Y". Then, click "Economy", and you should be able to see all of the global 10 year interest rates markets:
This configuration will get you "10 year" rates, but you can get different maturity bonds by using other tickers. For example, you can see United States 3 month rates by typing "US03M", or Brazilian 10 year rates by typing "BR10Y". All of the rates markets in our system follow this ticker standard. Try one! It's easy.
For people who aren't familiar, here's the lowdown on how interest rates work.
Interest rates fluctuate in the open market just like stocks or cryptocurrency; they move inversely to government bond prices. In this way, you can simply look at government bond prices to get a sense of how interest rates are doing -> they will be moving in the opposite direction.
The reason behind this is that when bonds are issued, they are issued with a "par value" and a "coupon rate". Let's say that the par value for a government bond is $1,000, and the coupon rate is 2%. This means that every year, the bond issuer will pay the bond owner $20.
The thing is, after bonds are issued, they can be traded freely in the open market. Let's say that the $1,000 bond increases in value and begins trading at $1,030 because there is significant demand for some reason. Because the $20 paid to the bondholder is fixed, the actual "interest rate" that buyers get when they pay $1,030 for the bond a bit lower than 2% -> 1.94% to be exact.
Thus, changes in bond prices change the real time "interest rates" in the market!
One thing to note: Government bond rates are different than the Government-set "funds" rate, which is decided on by a country's central bank.
Next week in part 2, we'll take a look what drives supply and demand for government bonds / interest rates, and how monetary policy influences all the assets you trade. Plus, how you can use this information to your advantage!
See you next week!
- Team TradingView ❤️❤️
Komen
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Want to see all the yields / bond prices? Check out this list!
Notice how US10Y is rangebound between the fed's 3.5% terminal rate (final rate hike level) and the fed's neutral rate of 2.5%. Coincidence...IThinkNot
arama-nuggetrouble
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@nuggetrouble, The terminal rate is the level the fed stops rate hikes and the neutral rate is a rate which is neither expansionary or contractionary. The US10Y will always peak at the terminal rate and stay above the neutral rate in a tightening cycle.... Current Terminal Rate and Neutral rate levels are determined by the market's prediction. If the fed is forced to tighten more, the US10Y will rise!
SpyMasterTrades
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@nuggetrouble, This is insanely insightful to know. Just added this to my trading notebook. Thank you.
arama-nuggetrouble
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@spy_master, IDK what info TradingView is giving on Interest Rates in their future point. But Rates are super important! If you understand how to read forward curves you will see relationships like this in US10Y.
SpyMasterTrades
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@nuggetrouble, Agree. Can you link us to where you get the neutral and terminal rates?
arama-nuggetrouble
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@spy_master, Terminal Rate can be found by constructing a forward curve on eurodollar futures or fedfundsfuture. Best to ask @TradingView . How can we construct forward curves in TV? But search google " Term FFunds Future, SOFR, USD LIBOR, and Treasury Forward Curves " and you should find something. The terminal rate will be highest rate in the futures curve. The fed has said many times in their speeches/communication that the neutral rate is 2.5%.
SpyMasterTrades
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@nuggetrouble, Got it thanks!
LGL
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@nuggetrouble, The terminal rate and the neutral rate vary with inflation and inflation expectations. When you substract inflation from the interest rate you get the real rate. Right at the moment, real rates are negative. This is a stimulative monetary policy. Inflation will stay sticky as long as the real rate is negative because borrowing to buy goods before they go up in price by a higher rate than interest is a profitable activity. If the neutral rate was 2.5% when inflation was running at 1.5%, then the real neutral rate is 1%; With core inflation now running at 6 percent, the neutral rate is then 7% nominal and 1percent real.
Bill_Howell
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@nuggetrouble, like spy_master says - a gem
SlimBob314
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@LGL sure, but that’s not usually what they’re looking at when they talk real rates. The Fed anyway. They’re subtracting the yields off TIPS from those off treasuries of corresponding maturity. It’s bullshit but it’s what they do.