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I’m learning about forex and the book that I am reading (Forex for Dummies) mentions rising 10-year government bond yields as a possible indicator of a currency that may be on the way up in relative value. The logic is that the increase in bond yield indicates a rising economy and therefore a greater possibility of an interest rate increase at some point in the future in order to keep a tab on inflation. Therefore more buying interest in the currency now and a rising relative currency value.
The link that I cannot make is the link between the rising economy and the rising bond yield. Is it because people are dumping bonds and buying stocks instead, thus pushing the bond price down and the relative value of the yield up. Or what?
Thanks.
What Is The Link Between An Improving Economy And Rising Govt. Bond Yields?
By antivirus software Posted in: RISING
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Essentially, yes. Perceptions of a “rising economy” will tend to move capital out of relatively low-yield bonds and into equities. Thus, the bond yields rise because demand for them slackens.
The key is INFLATION.
As you said when the economy is improving, the FED does not want the inflation run out of hand, they hav to RAISE the interest rate meaning REDUCING the amount of US currency circulating in the economy ( meaning INCREASE the value of the dollar during the period of the FED raising interest rate).
Think of interest rate cycle as WATER FAUCET, the fed controls the faucet, when the economy is too weak, the fed flood the economy with money ( so the VALUE of the currency has to decrease) because so much currency pump into the market, when the economy improving, the fed turn off the faucet slowly to reduce amount of the currency ( increase the value of currency).
Hope my simple example will answer your question