What Moves the Bond Market?

Price probing down. A test of 1765 area may be on the cards. Reaction off the lows was pretty strong today.

Yesterday the 20d MA was defended. Today price touched the lower end of the 15 Day bollinger band. Bands are squeezing indicating volatility ahead.

Yesterday the 20d MA was defended. Today price touched the lower end of the 15 Day bollinger band. Bands are squeezing indicating volatility ahead.

I didn’t trade much today (had a small position which I closed at the start of the European session). It looked pretty wild and I turned my pc on just after the lows of the day were in. I had not seen what had happened today so I left it alone. Basically I had no edge. It could turn out to be a lost opportunity as the ECB and NFP days are wild cards. Yesterdays large down day in Europe had a knock on and a very large volume day came today (2.1 million traded).

Price and delta made doji formations. I was going to say spinning top but in either case they represent indecision, a description which suits todays action:

Long-legged doji have long upper and lower shadows that are almost equal in length. These doji reflect a great amount of indecision in the market.

Long-legged doji have long upper and lower shadows that are almost equal in length. These doji reflect a great amount of indecision in the market.

 a spinning top indicates weakness among the bulls and a potential change or interruption in trend. After a long decline or long black candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend.

a spinning top indicates weakness among the bulls and a potential change or interruption in trend. After a long decline or long black candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend.

Anyway. This post is about a pdf I found on the new york fed site. It suggests that bond prices should not react so much to some fundamental news announcements but the surprise of these events causes portfolio rebalancing.

In an examination of the U.S. Treasury securities market, the authors attempt to explain the sharpest price changes and most active trading episodes. They find that each of the twenty-five largest price shocks and twenty-five greatest trading surges can be attributed to just-released macroeconomic announcements. They also measure the market’s average reactions to theses announcements and analyze the extent to which the reactions depend on the degree of announcement surprise and on prevailing market conditions. The market’s price and trading reactions are found to reflect differences of informational content in and among the varying announcements under changing market conditions.

http://www.newyorkfed.org/research/epr/97v03n4/9712flem.pdf

  • The market’s reactions depend on the surprise component of a given announcement and on conditions of market uncertainty.
  • The apparently weak informational effects found in the stock market are not entirely surprising. Much of the observable information likely to be relevant to the stock market as a whole takes the form of macroeconomic announcements. The theoretical effects of such announcements are often ambiguous for stocks, but not for bonds. The reason is that stock prices depend on both cash flows and the discount rate, while bond prices—for which cash flows are fixed in nominal terms—depend only on the discount rate.
  • An upward revision of expected real activity, for example, raises the discount rate for both stocks and bonds, which would reduce prices. At the same time, however, the revision raises expected cash flows for stocks, an outcome that increases stock prices. The net effect on bond prices of such an announcement is clearly negative, but the net effect on stock prices will depend on whether the cash flow effect or the discount rate effect dominates.
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One thought on “What Moves the Bond Market?

  1. Pingback: Times to Trade / Psychology | atoast2trading

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