Major Fundamentals That Move Interest Rates And The Bond Market (w/ links to relevant economics releases)

Highlights (with important links) of major fundamentals that affect interest rates, thereby, moving the bond market. It is known that there is a negative correlation between interest rates and U.S. Treasury bonds (and notes). During times of rising interest rates, we should invest in shorter-term issues, because the value of the shorter-term issues falls less than the longer. And vice versa. During times of falling interest rates, the value of long-term issues gains more than the shorter.

Major fundamentals that affect interest rates:

1) Unemployment: low unemployment signals a lower demand for credit, thereby, low interest rates expectation.

The first Friday of the Month, the U.S. Employment Situation is released at http://www.bls.gov/news.release/empsit.toc.htm One day prior to the release of that report is the release of Monster Employment Index at http://about-monster.com/employment/index/15 and every Thurs, the Jobless Claims report is released at http://www.dol.gov/opa/media/press/eta/ui/current.htm

2) Inflation: rate of inflation is priced into the cost of borrowing. In general, as the rate of inflation rise, so does interest rates as governments seek to rein in inflationary pressures (and vice versa). The US produces two major inflation reports: Producer Price Index, which measures costs of materials at wholesale or producer level, and Consumer Price Index, which measures at the personal or consumer level. Around mid-month, the US Producer Price Index and Consumer Price Index are released at http://www.bls.gov/ppi/ and http://www.bls.gov/cpi/

3) Crude oil and gold: indicators of inflation.

4) Housing starts: indicator of the demand for long-term mortgage money, that is, more credit demand leads to higher interest rates. This indicator affects Treasury Bonds far greater than Euros or shorter-term contracts. During the third week of the month, the US Housing Starts is released at http://www.census.gov/const/newresconst.pdf and one day prior to that is the Housing Market Index at http://www.nahb.org/news.aspx?list=1&sectionID=134

5) Industrial production: greater economic activity means more need for credit, thereby, rising interest rates expectation. Philly Fed Survey is released the 3rd Thurs of each month at http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/ and US Industrial Production is released mid-month at http://www.federalreserve.gov/releases/g17/

6) Business inventories: indicator of future demand for short-term credit. If inventories are low and economic activity is picking up, then businesses look for credit to finance inventories, thereby, increasing interest rates expectation. Shorter-term contracts are more affected than longer. Mid-month, US Business Inventories is released at http://www.census.gov/mtis/

7) Gross Domestic Product (GDP): Market expectations are affected by GDP.  Around the fourth week of the month, US GDP is released at http://www.bea.gov/national/

8) Balance of Trade: affects currencies more than interest rates. In general, a strong dollar by stronger balance of trade leads to stronger bond prices in that domestic securities are more attractive to foreign buyers. Around mid-month, the US International Trade is released at http://www.bea.gov/international/

9) Disposable income: indicative of general economic activity driven by consumer’s buying power, affecting credit demand. Last week of the month, U.S. Personal Income and Outlays is released at http://www.bea.gov/national/

10) Retail sales and car sales: consumer confidence and liquidity.

11) Index of leading indicators: even though the accuracy of this report may easily be manipulated, the market reacts to this now, regardless of its accuracy in the future. Third week of the month, Index of Leading Indicators is released at http://www.conference-board.org/data/bcicountry.cfm?cid=1

12) Debt offerings: The supply of new securities could increases due to either government’s need for money or private financing, thus, (generally in the short-term) hurting the pricesof these securities. The Wall Street Journal publishes future supply of new issues at http://online.wsj.com/mdc/public/page/2_3022-bondoffer.html#treasurys

13) Federal Reserve: The minutes of the FOMC (Federal Reserve’s Open Market Committee) is published each month. Even though it’s from the prior month’s, it is still useful because the Federal Reserve usually do not change policy on a whim. The Fed sets the discount rate, which is the interest rate the Fed charges to banks that borrow from it. Higher discount rates are passed on by banks to their customers in higher consumer interest rates. High discount rates result in lower bond prices, which could be falling for weeks ahead of the day the news is announced because the market is already pricing the news in. Thus, on the day of the news, the price could spike down but close higher on later on that day. Interest rate futures traders will often hear the phrase repos, which are repurchase agreements, that is, transactions of sale of securities with intention to repurchase at a stated price in the future. Repos means that the Fed is lending money and increasing reserves, generally, a sign of lower interest rates (loose monetary policy). Reverse Repos work in reverse.

The Minutes is released at http://www.federalreserve.gov/releases/h41/ and Every Thurs, the Fed Balance sheet is released at http://www.federalreserve.gov/newsevents/press/monetary/20110518a.htm

14) Fed funds rate: is charged to banks for lending reserves among themselves. This can change daily and numerous times in a day and is a strong indication of Fed policy.

Bottom line: all of these fundamentals are important to watch, and yet none of them is important. Traders must pay attention to which indicator(s) the market is focusing on at the time.

Calendar of Current Economic Events Can Be Found Here: http://www.cmegroup.com/education/econ_calendar.html

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