FOREX TRADING with Fundamental Analysis
I am trying to explain it in simple language. I could use TECHNICAL
language like yield, face value or bla bla but I am not using to make it
simple.
Twister means swap or change.
Federal Reserve has bonds in their portfolio. You know BONDS have maturity period
like 1 year, 2 years, 3 years, 10 years, 15 years, 30 years. Higher period
BONDS give higher interest and lower period BONDS give lower interest. So if we
get 2% interest rate from 1 year BOND, then obviously we shall get 2%+ interest
rate from 2 years BOND. This is normal situation. Sometimes abnormal situation
happens. That is different situation.
Now Supply and Demand: You know guys when something's supply is up, then its price will go down. Say a BOND has a face value and market value both of $100 and its interest rate is 2% . Then right now its Yield is also 2%. If its market value is lowered due its supply then say its market value right now is $95. As bond's interest rate is fixed so you will get $2 from this bond also per year. Now you bought the bond at $95 and the amount you are getting after one year is $2 then your YIELD=2.10%. So if one bond's supply is increased then its value will go down and its yield will rise. If a bond's Supply is reduced then its demand will increase and market price will go up and yield will go down. This is all about BOND market and YIELD in Brief.
Now the Twister Operation: FED has BONDS in their portfolio. I have told it in the outset of the article. They have some short time period BOND which have to pay off within one or two year. The total BOND valued like this is near about $400 Billion Dollar. They are going to sell their short term bonds. When they will sell bonds they will get money after the sell of short term bonds. Right? They will use this money to BUY LONG TERM BONDS from the market. I think up to this it is clear to all about what is actually TWISTING OPERATION done by US FED in last September.
What will be the reaction? This is the main part of the article. As there are so many news and so many articles available on this issue. But I rarely got any clear clue about the reaction of this decision made by FED. I am here explaining it. The sold BONDS are short time right? Then who will buy those bonds will be able to en cash those bonds within short time..Right? Then the money flow in the economy is going up. FED was trying to do that…They wanted to increase money flow in the economy.. Quantitative easing can do this, but the problem with Quantitative easing is: it makes the inflation high and vulnerable. So they are doing it with selling short time period bonds to holders of long term bond holders. In this way LONG term bond holdings of FED will go up and the yield will go down as the SUPPLY is reduced of long term bonds.
So ultimately FED is empowering money supply in US economy without
hampering the US inflation and not extending the Balance Sheet of FED.
This is all. Will see you again with another issue. Happy Trading
