Interest Rates and The Macro Trader
Trading any and everything macro traders look for asset classes that have sufficient liquidity and then trade them when they can find a great risk to reward opportunity. They will trade stocks, bonds, currencies, and commodities when they think that they have an edge.
One of the classic asset classes for the macro trader is that of fixed income. There have been several academic studies that show that when interest rates are rising or declining macro traders earn abnormal returns. In practice the same phenomenon has been observed. This is not a random thing as there are several reasons why this is the case.
Why does this happen? Well if you look at how interest rates change you will see that the typical trend goes like this up, up, up, up, up, flat, flat, flat, down, down, down, down. And not like this up, down, up, down, etc.
Worldwide central banks are trying to manage entire economies. In so doing they cant turn on a dime and instead are forced to guide the huge cruise ship in a smooth manner. Instead of changing their minds every meeting they instead will raise three, four, even ten times in a row before pausing for a while and then typically reversing course and easing rates several times in a row. It takes a while to change the growth of a nation and this time is where macro traders gain a significant part of their edge.
By looking at the economy and reading the meeting notes of central banks, macro traders can better figure out what is likely to happen in regards to interest rates and position themselves accordingly. Sometimes the trend will only last a few meetings but most of the time it will last several months and maybe even a few years which of course magnifies the potential opportunities.
These opportunities are available in several markets since interest rates, also known as the cost of money, effect all asset classes. You can find abnormal profits in stocks, bonds, commodities, and currencies depending on what is happening with interest rates.
In fact fixed income is one of the primary profit drivers of macro trading. Because interest rate trends are so well defined the risk is less then an outright position is stocks or commodities in a normal cycle. Yes, there are still risks but they are lessened. If rate are coming down bonds will go up and if they are going up then bonds will go down.
Global macro traders are the kings of interest rate trends and profiting from them. If you want to generate higher returns with less volatility then it pays to track rate trends and position yourself accordingly. One other bonus is that in this electronic age central banks are becoming more and more transparent, making our jobs all a lot easier. - 23217
One of the classic asset classes for the macro trader is that of fixed income. There have been several academic studies that show that when interest rates are rising or declining macro traders earn abnormal returns. In practice the same phenomenon has been observed. This is not a random thing as there are several reasons why this is the case.
Why does this happen? Well if you look at how interest rates change you will see that the typical trend goes like this up, up, up, up, up, flat, flat, flat, down, down, down, down. And not like this up, down, up, down, etc.
Worldwide central banks are trying to manage entire economies. In so doing they cant turn on a dime and instead are forced to guide the huge cruise ship in a smooth manner. Instead of changing their minds every meeting they instead will raise three, four, even ten times in a row before pausing for a while and then typically reversing course and easing rates several times in a row. It takes a while to change the growth of a nation and this time is where macro traders gain a significant part of their edge.
By looking at the economy and reading the meeting notes of central banks, macro traders can better figure out what is likely to happen in regards to interest rates and position themselves accordingly. Sometimes the trend will only last a few meetings but most of the time it will last several months and maybe even a few years which of course magnifies the potential opportunities.
These opportunities are available in several markets since interest rates, also known as the cost of money, effect all asset classes. You can find abnormal profits in stocks, bonds, commodities, and currencies depending on what is happening with interest rates.
In fact fixed income is one of the primary profit drivers of macro trading. Because interest rate trends are so well defined the risk is less then an outright position is stocks or commodities in a normal cycle. Yes, there are still risks but they are lessened. If rate are coming down bonds will go up and if they are going up then bonds will go down.
Global macro traders are the kings of interest rate trends and profiting from them. If you want to generate higher returns with less volatility then it pays to track rate trends and position yourself accordingly. One other bonus is that in this electronic age central banks are becoming more and more transparent, making our jobs all a lot easier. - 23217
About the Author:
If you need actionable trading ideas then check out The Macro Trader It is a weekly global macro research advisory publication with frequent intra-week updates for time-critical analysis and actionable trading ideas.
posted by X - Men @ 4:19 AM
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