Before going straight to our topic today, which is the effect of fixed income securities on currencies and their movements, let us talk about bonds first. A bond is when an entity loans money from a financial institution like a bank or any ordinary person. The entity will pay this loaned money at a predetermined date. The investor lends money to the investors and receives bond yields, also known as the specified rate of return. Now, there is also such thing as bond spreads. A bond spread is a difference between two countries’ or economies’ interest rates.
Furthermore, these rates of return can tell us a lot about the currency price movement. For example, the more the bond spread widens, the more the currency with a higher bond yield appreciates against the lower bond yield currency.
Fixed income securities and currencies
What is fixed income security? It is an investment just like a bond that allows a person to pay a fixed price at regular time intervals. Therefore, the countries with an economy with higher returns on their fixed income securities tend to get the attention of more investors. Hence, these currencies spark the investors’ interest more than other countries with economies that offer less return on their fixed income.
Let us name some of the most popular bonds from different countries and economies together with their nicknames.
- The US – US treasury bond or Yankee bond
- United Kingdom – Gilts or bulldog bond
- Japan – Samurai bond or simply, Japanese bond
- Eurozone – Euribors or Eurozone bonds
- Germany – Bunds
- Switzerland – Swiss bonds
- Canada – Canadian bonds
- Australia – Kangaroo bonds, Australian bonds, or Matilda bonds
- New Zealand – Kiwi bonds or simply New Zealand bonds
- Spain – Matador bonds
Let us cite an example.
For the sake of citing an example, we are just going to assume the rate of return of the economies that we will use. Let us say that the Kangaroo bonds have a lower rate of return compared to the Yankee bonds. Would it make sense that investors will not prefer or at least hesitate to put their money on Australia’s fixed income market? They think that they would rather bet their money on high-yielding assets.
Due to this investor insight and behavior, there is a significant tendency that the AUD currency will weaken against other currencies. Now, we only used this as an example, but this can happen to any fixed income market.
If you want to keep posted
If you want to know more details and updates about correlations, government data, and corporate bonds, there are few ways to do so. The internet is a wonderful place for this. First, you can head over the Bloomberg or the Trading Economics website. Or else, you can also visit government websites and check if they have data on current bond yields.
So, which is the best choice?
Almost all, if not all, economies offer bonds because the governments will always need funds to operate. However, most traders who want to be on the safe side choose countries having the major currencies. Note that these bonds do not have the same maturity dates.