What Forex Traders Need to Know About Bonds

Most forex traders look at charts, economic calendars, and central bank statements. And that’s normal. But there is one market that often remains “behind the scenes,” even though it frequently moves currencies earlier, more strongly, and more logically than the news. That market is the bond market (debt market).

In short, currencies are the reaction, and bonds are the cause. If the currency market is an ocean, then the bond market is an underwater current that determines where that ocean will move. Let’s take a look at why it is vital for forex traders to keep an eye on the debt market and how to turn this into profit.

What Are Bonds?

If we disregard the complex definitions, a bond is simply a promissory note. When a government (for example, the US or Germany) needs money to build roads or close budget gaps, it issues bonds. You buy this paper, lend money to the government, and it promises to pay you a fixed interest rate (coupon) and return the entire amount after a certain period.

For us traders, government bonds (Treasuries in the US, Bunds in Germany, Gilts in the UK) are the most important. Why? Because they are considered risk-free assets.

Key Parameters of Debt Securities

• Face value and price: Unlike stocks, the price of a bond on the exchange fluctuates constantly.
  
• Yield: This is the most important indicator. Yield is the annual percentage you will receive if you buy a bond right now at market price.

There is a fundamental rule: The price of a bond and its yield always move in opposite directions. If the price falls, the yield rises. If the price rises, the yield falls.

For a forex trader, yields are the “cost of money.” When US government bond yields rise, it means that the dollar becomes more attractive to large investors. Why take risks on stocks when you can earn 4-5% per annum in the “safe” dollar?

Risk and Trust

Bonds also reflect the level of confidence in a country. If investors begin to doubt the stability of the economy, budget, or politics, they:

• sell bonds;
• demand higher yields;
• withdraw capital.

This almost always affects the currency. A classic example is emerging markets. A sharp rise in local bond yields is often accompanied by:

• a fall in the national currency;
• increased volatility;
• and central bank interventions.

Correlation Between Bonds and Currencies

Why does currency react to bonds? It’s all about capital flows. Institutional investors (pension funds, banks, hedge funds) are constantly seeking a balance between risk and return.

Imagine a scenario: the yield on 10-year US bonds (US10Y) begins to rise sharply, while the yield on Japanese bonds (JGB) remains stagnant. What does a large Japanese fund do? It sells yen, buys dollars, and invests them in US bonds to lock in high yields.

The result: massive selling of the yen and buying of the dollar. The USD/JPY pair soars.

In 80% of cases, there is a direct correlation between bond yields and the national currency:

• A country’s bond yields rise – Demand for that country’s currency rises – The currency strengthens.
• A country’s bond yields falls – The currency weakens.

However, it is important not just to look at the yields of one country, but to compare them. In trading, this is called the interest rate differential. If yields in the US grow faster than in Europe, the EUR/USD pair will fall, as capital “flows” into the more profitable dollar.

How the Bond Market Helps Make Decisions on Forex

The bond market is a “market of smart money.” It is much larger than the currency or stock market in terms of volume and much less emotional. Bonds are the first to react to inflation and decisions made by central banks (the Fed, the ECB).

1. Confirming the Trend

If you see that the GBP/USD pair has started to rise on the chart, check the yield on British Gilts. If yields in Britain are also rising relative to those in the US, then the movement is genuine and backed by real investor money. If the currency is rising “on its own” out of nowhere, and bond yields are falling, it is most likely a false breakout or temporary speculation.

2. Leading Indicator (Yield Curve)

A yield curve inversion is when short-term bonds (e.g., 2-year) become more profitable than long-term (10-year) bonds. For traders, this is a powerful signal of an impending recession. At such times, the market begins to move toward safe havens.

When there is fear in the market, investors buy up US bonds, their price rises, and their yield falls. At the same time, the USD, JPY, and CHF usually strengthen.

3. Predicting the Actions of Central Banks

Central banks set interest rates, but the bond market often “knows” about this in advance. If the yield on 2-year US bonds began to rise a month before the Fed meeting, it means that the market has already priced in a rate hike. By the time the news is announced, the dollar may even fall (the classic “buy on rumors, sell on facts”) because bonds have already played out in this scenario.

Why the Bond Market Is More Important Than the News

Forex traders love news: CPI, NFP, GDP, and central bank meetings. But the bond market trades daily, continuously, and in huge volumes.

When news breaks, bonds often:

• either already factor in this scenario,
• or instantly show how the market really feels about it.

If, for example, inflation is high, but bond yields are not rising, this is a signal that the market does not believe in aggressive policy tightening. In such cases, the currency often does not receive support either, despite the “bullish” news.

What else Is Important for Traders To Know About Bonds

Intermarket Analysis

Bonds are closely linked to gold. Gold does not pay coupons. Therefore, when the real yield on bonds (nominal rate minus inflation) rises, gold becomes less attractive and falls in price. If you trade the XAU/USD pair, watching the US10Y is your direct responsibility.

Real vs Nominal Rates

This is an advanced level. Sometimes nominal yields rise, but inflation rises even faster. In this case, the “real” yield is negative. This is a bad sign for the currency. A currency gains real strength when real rates rise, which is a sign of healthy investment inflows.

Searching for “Divergences”

The most profitable trades occur when there is a gap between currencies and bonds. For example:

1. German bond yields (Bunds) have been rising actively for a week.
2. At the same time, the EUR/USD exchange rate is flat or even slightly declining.
3. Conclusion: The currency is “underperforming.” It is a spring that will soon shoot up, catching up with the bond market.

Practical Tips

You don’t need to become a professor of macroeconomics. Just add a few tools to your daily analysis:

• Keep an eye on the “tens”. Add the US10Y ticker (yield on 10-year US bonds) to your terminal or TradingView. Compare its movements with the major pairs.
• Use spreads. Look at the difference (spread) between the yields of bonds from two countries. For example, subtract the yield on German 10-year bonds from that of US bonds. This chart will practically mirror EUR/USD, but often with a slight lead.
• Auction calendar. Pay attention to the days when major countries issue new bonds. Large auctions can cause spikes in volatility in the currency market, as foreigners will need to buy a lot of the national currency to purchase these bonds.

Key Benchmarks

These instruments influence the entire market as a whole, as they set the tone for global risk appetite.

• US10Y: Yield on 10-year US bonds. The main indicator of the “cost of money” in the world.
• US02Y: Yield on 2-year US bonds. Most sensitive to expectations regarding Fed rates for the coming year.
• DXY: Dollar index (for comparing bond dynamics with the real exchange rate).

Currency Pair Tickers

For each pair, we look at the yield on 10-year government bonds (10Y) of both countries.

• EUR/USD (Euro/US dollar)

Here, we compare the US and Germany (as the driving force behind the Eurozone).

DE10Y – German bonds (Bunds).

Spread formula: DE10Y – US10Y

Logic: If the spread widens (becomes less negative or turns positive), EUR/USD usually goes up.

• USD/JPY (US dollar/yen)

The most bond-sensitive pair. The Japanese yen is a currency with historically low interest rates.

JP10Y – Japanese Government Bonds (JGB).

Spread formula: US10Y – JP10Y

Logic: Direct correlation of almost 90%. As US yields rise, USD/JPY soars.

• GBP/USD (pound/US dollar)

GB10Y — UK bonds (Gilts).

Spread formula: GB10Y – US10Y

• AUD/USD (Australian dollar/US dollar)

Australia often offers higher yields, which is important for a carry trade.

AU10Y – Australian bonds.

Spread formula: AU10Y – US10Y

• USD/CAD (US dollar/Canadian dollar)

Canada is a commodity-based economy, but its debt is closely correlated with that of the US due to their proximity.

CA10Y — Canadian bonds.

Spread formula: US10Y – CA10Y

How to Use It in TradingView?

How to set this up in TradingView:

• • Direct Tickers: Search for TVC:US10Y-TVC: DE10Y, etc., to add them to your side Watchlist.

• • Visual Overlay: Open a chart for a currency pair (e.g., EUR/USD) and use the “Compare” tool (the plus icon next to the ticker name) to overlay the corresponding spread.

• Pro Tip: Set the Spread to a Line Chart and the Currency to Candles. When you see the Line moving up while Candles are flat or moving down, you have found a divergence – this is often where the most reliable setups occur.

You will see how often the currency “lags” behind the spread movement. These are the best entry points.

Final table for setting up your Watchlist:

Remember: the bond market is a roadmap for Forex. Bonds show where money is flowing, how investors assess risk, and what they think about future inflation. If you learn to at least check yields before opening a trade, your trading will become much more informed.