Macro Trading and Interest Rate Cycles
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.
Central banks such as the Fed or the ECB rarely raise rates at one meeting and then lower them at the next. Instead they typically will raise, raise, raise, raise, hold, hold, hold, lower, lower, lower, etc. They move rates gradually because they are driving the equivalent of an aircraft carrier and not a jet ski, in other words they are trying to steer an entire economy and not a one man shop. Entire economies take time to move, and this is where a large part of the macro traders edge comes in.
By watching the moves of central banks and the economy traders can better forecast what is likely to happen. By not trying to pick the exact tops and bottoms macro traders can more safely generate their returns. Sometimes the central bank will only lower rates a few times before embarking on a new tightening cycle but typically these trends lasts months and months if not years and years which helps to generate even higher returns.
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.
Another great trade is when you go long a higher yielding currency and short a low yielder in order to earn the carry. If you pay strict attention to the action of the central banks you can make good money in the carry trade. But the granddaddy of interest rate trades is to simply go long bonds in an easing cycle and go short in a tightening cycle.
If you want to trade using global macro then start learning about how interest rates effect different asset classes and how to read the notes of central banks. In recent years they have been giving increasing transparency which makes it easier to decide what you as an investor must do. - 23196
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.
Central banks such as the Fed or the ECB rarely raise rates at one meeting and then lower them at the next. Instead they typically will raise, raise, raise, raise, hold, hold, hold, lower, lower, lower, etc. They move rates gradually because they are driving the equivalent of an aircraft carrier and not a jet ski, in other words they are trying to steer an entire economy and not a one man shop. Entire economies take time to move, and this is where a large part of the macro traders edge comes in.
By watching the moves of central banks and the economy traders can better forecast what is likely to happen. By not trying to pick the exact tops and bottoms macro traders can more safely generate their returns. Sometimes the central bank will only lower rates a few times before embarking on a new tightening cycle but typically these trends lasts months and months if not years and years which helps to generate even higher returns.
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.
Another great trade is when you go long a higher yielding currency and short a low yielder in order to earn the carry. If you pay strict attention to the action of the central banks you can make good money in the carry trade. But the granddaddy of interest rate trades is to simply go long bonds in an easing cycle and go short in a tightening cycle.
If you want to trade using global macro then start learning about how interest rates effect different asset classes and how to read the notes of central banks. In recent years they have been giving increasing transparency which makes it easier to decide what you as an investor must do. - 23196
About the Author:
If you need actionable trading ideas then check out The Macro Trader It is a weekly global macro investing advisory publication with frequent intra-week updates for time-critical analysis and actionable trading ideas.
posted by X - Men @ 5:35 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home