The Macro Trader and Interest Rate Cycles
Macro traders via their mandate are able to trade any and all liquid asset classes. Whether they be stocks, bonds, commodities, or currencies macro traders look for the best risk to reward opportunities on the planet.
An area of the financial markets where macro traders tend to do really well is that of fixed income and interest rates. Both academia and practitioners of global macro have found this to be the case over the years. This is not a fluke as the basic trend of interest rates essentially screams profit opportunity.
To understand why this is the case it is important to look at how interest rates are raised and lowered. As opposed to many things which go up or down seemingly at random, short term interest rates are moved in a very methodological manner.
Central banks such as the Fed or the ECB rarely raise rates at one meeting and then lower them at the next. Instead they typically will raise, raise, raise, raise, hold, hold, hold, lower, lower, lower, etc. They move rates gradually because they are driving the equivalent of an aircraft carrier and not a jet ski, in other words they are trying to steer an entire economy and not a one man shop. Entire economies take time to move, and this is where a large part of the macro traders edge comes in.
By watching the moves of central banks and the economy traders can better forecast what is likely to happen. By not trying to pick the exact tops and bottoms macro traders can more safely generate their returns. Sometimes the central bank will only lower rates a few times before embarking on a new tightening cycle but typically these trends lasts months and months if not years and years which helps to generate even higher returns.
And whereas the regular stock trader only has two main decisions that they can make in light of interest rate changes the macro trader has several tools and trading strategies at their disposal. You can go long high yielding currencies, you can go short oil, or you can do the classic trade and go long or short bonds.
One of the classic trades is to go long zero coupon Treasury bonds when rates are to be cut and to short them when rates are headed back up. By doing this a macro trader can earn substantial profits and if they use leverage they can make even more. While there are several potential risks involved in the trade the primary one, especially in a easing cycle, is simply that of interest rates.
Global macro traders are the kings of interest rate trends and profiting from them. If you want to generate higher returns with less volatility then it pays to track rate trends and position yourself accordingly. One other bonus is that in this electronic age central banks are becoming more and more transparent, making our jobs all a lot easier. - 23305
An area of the financial markets where macro traders tend to do really well is that of fixed income and interest rates. Both academia and practitioners of global macro have found this to be the case over the years. This is not a fluke as the basic trend of interest rates essentially screams profit opportunity.
To understand why this is the case it is important to look at how interest rates are raised and lowered. As opposed to many things which go up or down seemingly at random, short term interest rates are moved in a very methodological manner.
Central banks such as the Fed or the ECB rarely raise rates at one meeting and then lower them at the next. Instead they typically will raise, raise, raise, raise, hold, hold, hold, lower, lower, lower, etc. They move rates gradually because they are driving the equivalent of an aircraft carrier and not a jet ski, in other words they are trying to steer an entire economy and not a one man shop. Entire economies take time to move, and this is where a large part of the macro traders edge comes in.
By watching the moves of central banks and the economy traders can better forecast what is likely to happen. By not trying to pick the exact tops and bottoms macro traders can more safely generate their returns. Sometimes the central bank will only lower rates a few times before embarking on a new tightening cycle but typically these trends lasts months and months if not years and years which helps to generate even higher returns.
And whereas the regular stock trader only has two main decisions that they can make in light of interest rate changes the macro trader has several tools and trading strategies at their disposal. You can go long high yielding currencies, you can go short oil, or you can do the classic trade and go long or short bonds.
One of the classic trades is to go long zero coupon Treasury bonds when rates are to be cut and to short them when rates are headed back up. By doing this a macro trader can earn substantial profits and if they use leverage they can make even more. While there are several potential risks involved in the trade the primary one, especially in a easing cycle, is simply that of interest rates.
Global macro traders are the kings of interest rate trends and profiting from them. If you want to generate higher returns with less volatility then it pays to track rate trends and position yourself accordingly. One other bonus is that in this electronic age central banks are becoming more and more transparent, making our jobs all a lot easier. - 23305
About the Author:
If you need actionable trading ideas then check out The Macro Trader It is a weekly global macro trading advisory publication with frequent intra-week updates for time-critical analysis and actionable trading ideas.
posted by Mr. Forex at
1:57 AM
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