Bonds have a significant role in determining the direction of currencies and exchange rates,

If you haven’t been tracking them as part of your trading, here’s a good primer on why you should and how they influence the currency pairs in your portfolio.

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The Bond Market

Bonds are a trading specialty in their own right.

You don’t need to be an expert in bonds in order to understand their influence on currency markets. Because bonds are so closely connected to currency pairs, bonds traders find it an easy transition to forex and vice versa.

This is partly because bond rates typically move in tandem with currency pairs. And things that influence currencies also influence bonds. Or, more accurately, economic events influence bonds which influence the currency.

From a forex trader’s perspective, we focus on the most important of the bonds: treasuries or sovereign bonds.

These are debt commitments issued by the government, and virtually all the debt of a country is denominated in bonds. These bonds are considered the most reliable. They are the ones that are most likely to be paid off and can function in the same way a currency can. Often, big corporate deals will be paid with bonds instead of actual cash, because it’s more convenient.

Bond Prices and Yields

A bond is a commitment by the issuer to pay a certain amount of money in the future, plus interest rates. So, it’s like a loan. But, unlike a loan, it’s transferable. You can buy and sell bonds.

The price of a bond depends on how likely the bond issuer is to pay the bond back, plus the interest rate. If the issuer is less likely to pay the bond back, then the interest rate needs to be higher to offset that risk and incentivize people to buy it.