Dollar, yields and liquidity
Lesson 3 of 12 in the course “Analytics”. Free, with animations and a quiz.
The dollar and the real yield
DXY: an index of the dollar against a basket of 6 major currencies. Bond yield: the yearly percent the buyer of a bond will earn. The 10-year real yield (code DFII10): the yield on 10-year US government bonds minus expected inflation. When both rise, holding dollars and bonds pays better. That often weighs on gold, stocks and crypto. Often, but not always.
Real yield, simply explained
Example: a 10-year US bond pays 4.5% a year. The market expects 2.3% inflation a year. The real yield is about 4.5% − 2.3% = 2.2%: that is what you earn above rising prices. The higher it is, the more tempting it is to sit in safe bonds. Gold and BTC pay no interest, so they find it harder to compete for money then.
2 years, 10 years and the curve
The 2-year US bond yield mirrors expectations for the Fed rate and reacts fast to what the Fed says. The 10-year is "the world's main rate": mortgages and stock valuations are built on it. The curve is the 10-year minus the 2-year. Example: 4.0% − 4.5% = -0.5 percentage points. A minus means inversion. Historically it often came before a recession, meaning an economic downturn. But it is not a timer.
Liquidity: how much money is around
Liquidity is how much free money is flowing through the system. The Fed balance sheet (code WALCL): everything the Fed holds, mostly bonds it bought. Growing: money is being added. Shrinking: money is being pulled out. Bank reserves: banks' money in their accounts at the Fed, their safety cushion. M2 y/y: how much the money supply, meaning cash plus deposits, grew in a year. More money often supports risky assets, but not always.
Vacuums: ON RRP, TGA, SOFR
ON RRP: a "parking lot" at the Fed where funds put spare cash overnight for interest. TGA: the US Treasury's account at the Fed. When these two accounts grow, money moves there out of the market, like into a vacuum cleaner. SOFR: the rate at which banks and funds borrow dollars overnight against bonds as collateral. A sudden spike means dollars are in short supply.
Jobs market: NFP and claims
NFP (Nonfarm Payrolls): how many jobs outside farming the US added in a month. It usually comes out on the first Friday of the month, together with the unemployment rate. Jobless claims, meaning new requests for unemployment benefits, come out every week on Thursdays: the most frequent signal. A strong job market gives the Fed a reason not to rush rate cuts. A weak one pushes it to cut.
Central bank rates and currencies
The Fed is not the only one with a rate. The ECB (eurozone), Bank of England, Bank of Japan, SNB (Switzerland), RBA (Australia) and Bank of Canada all have their own. Money flows to where the rate is higher. Example: 5% vs 1%, a gap of 5 − 1 = 4 p.p., percentage points. All else equal, the currency with the higher rate gets demand. It helps to keep all rates in one table, and you can dig into currencies in the Forex track on Brainax.
Weekly calendar: macro and crypto
Every week has its key dates: CPI, NFP, central bank decisions. Keep the calendar in your own time zone so you do not wake up in the middle of a move. Crypto projects have their own calendar, for example CoinMarketCal: listings (a coin gets added to an exchange), releases (a new version ships), AMAs (open Q&A with the team). Check the date, the coin and the type of event, and mark what touches your coins.
Mistake: trading the news minute
In the minute NFP or CPI comes out, price jerks both ways. The spread, the gap between the buy and sell price, widens. And leverage gets both longs and shorts (bets on up and on down) liquidated: the exchange force-closes their trades. The mistake is jumping in that minute with no plan. Decide in advance: what you do if the number beats expectations, what if it misses. And whether it is smarter to just sit it out.
Check yourself
- What did the market hear in the speech?
Correct answer: Rates stay high for longer or go up. The 2-year yield mirrors what traders expect from the rate over the next couple of years. It rose, so traders now expect a tougher Fed. For risky assets that is usually a headwind. - What is happening to market liquidity?
Correct answer: There is less free money in the market. ON RRP and the TGA work like vacuum cleaners: money parked there is not circulating in the market. If the Fed's balance sheet is flat while the vacuums grow, there is less free money in the system. That usually does not help risky assets. - All else equal, where will money flow?
Correct answer: Into currency A, where the rate is higher. Money looks for yield: a deposit in currency A pays 4 p.p. more. That is why rate gaps are one of the main drivers of currency pairs, and the carry trade strategy is built on them. - What is the smartest move?
Correct answer: Have a plan ready or sit out the release minute. In the first minutes price gets thrown both ways and leverage easily wipes out both sides. Pros decide everything before the number: what they do if it beats expectations, what if it misses. "I don't trade it" is a perfectly good plan too.
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