What’s that, I hear you say? I thought it was stocks that I could trade, and that bonds are just a fixed interest financial instrument – where’s the trading in that? If you think that, you may be missing out on an important section of the market by not having a T-Bonds trading system.  Well, it’s true that bonds are different from shares. Bonds are loans to the company or the government, so you are holding debt and not a portion of the company, or equity share.  You get a fixed interest, for a set period until maturity, and if a company files for bankruptcy you have priority over the stockholders, or owners. In the case of treasury bonds, they are considered extremely safe because they are backed by the government.  Bonds mature in ten or more years, and notes have a maturity date from one to ten years away. If you hold a bond for long enough, in addition to regular interest payments you will be paid back the face value or principal at maturity.

This simple explanation, however, denies the practicalities of the marketplace. The actual price of a bond does fluctuate throughout its life in response to a number of variables. When a price can go up and down, we have a trading instrument, and many people profit from using a T-Bonds trading system. When a bond sells at a price above its face value, it is selling at a premium, and when it trades below its face value, it sells at a discount. The interest paid is also called the coupon rate, because of the way bonds used to be issued. The yield is the actual return you get when you factor in the price – that is, the coupon divided by the price.

One of the main factors in determining the price is the interest rate – you can imagine, for example, that if the coupon was, say, 10%, then demand for the bond would be high and the price of the bond would rise way above the face value, as investors would pay more to get that yield.  They might even pay twice the face value, so that their actual yield was 5%, if this was a good rate at that time in the economy.  So the price of a bond can vary dramatically even if the prevailing interest rate varies by as little as a point.  That is why it can be exciting to trade bonds.

You’ll find that the prices of stocks and bonds are often related. For instance, it’s well accepted that the Treasury bond market usually leads the stock market. When bonds rise, then often stock prices will rise to follow suit. One reason for this is obvious –when bonds rise in price, the yield falls, thus some money switches from bonds to investing in stocks and the increasing demand pushes the prices up.

Another relationship concerns treasury bonds and the CRB (Commodity Research Bureau) Index. These have an inverse relationship, so that when commodity prices fall, bond prices often increase, along with stock prices. You can use the technical indicators that you are familiar with from stock trading, as any time that people are trading their emotions help define the price movements, regardless of the market, and all you need to do is watch the price patterns to get in tune with the precise way that the fluctuations occur.