State bonds as a factor to buy one or another currency
Recently, treasury government bonds, or simply state bonds, are an ever-increasing market driver, having a direct impact on one or another currency. Often, the growth of state yield. bonds of this or that country also has a positive effect on the national currency, but there are exceptions.
Previously, the influence of Treasury bonds on the market of currencies was repeatedly described. Because some of the subtleties we omit. You will learn about the previous articles:
- “How long will the rising rally of the American continue based on the growth of the profitability of the US bonds? “
- “Government Bonds as a Market Driver”
We return to the basic law of the state. bonds – with an increase in the yield of state. bonds are increasing and investments in this or that economy. From this we can draw a logical conclusion – the higher the yield of state. bonds, the more profitable is the investment in the national currency. And kind of it.
Draw a parallel between the value of three world currencies: the US dollar, the euro, the British pound and the yield of their ten-year state. bonds. Ten-year state. bonds are considered an average indicator of all bonds of the country.
Fig. 1. Chart of the US dollar index and the US 10-year bond yield is blue line.
As seen from the first figure, the dynamics of the dollar index and US 10-year state bonds has an inverse correlation, which contradicts the above. This situation is due to the fact that high yield of state bonds limits the economic development and, as it were, strangles investment in risky assets, thereby limiting economic growth. Therefore, the yield of 10-year-old US state bond is conditionally limited to 3%. From which there is a high probability of retreat, which under conditions of inverse correlation can support the US currency.
Other currencies, the euro and pound, have a direct correlation with the 10-year-old state bonds.
Fig. 2. Chart of the pair EUR / USD and the Germany 10-year state bonds yield – green line.
For the euro it is taken Germany state bonds, because Germany is the locomotive of the EU. In this case, there is a direct correlation.
Fig. 3. Chart of the pair GBP / USD and the UK 10-year state bonds yield – red line
There is also a direct correlation, but with a much lower level of dependence, due to the increased risks associated with Brexit.
As a result, the level of profitability of 10-year state bonds can determine a certain popularity of investment in the economy of a country, which ultimately indicates the popularity of the national currency, and can serve as a leading indicator for long-term investments.