Global Macro Investing and Yield Curve Strategies

The yield curve is one of the most and best used instruments in the global macro investors arsenal. The yield curve is usually thought of as a bond traders tool but good global macro trader know better. You can use the yield curve to trade bonds, stocks, currencies, and really just about anything that affects the economy, heck you can even use to for refinancing your home.

The Treasury yield curve is the curve you get when you plot out the yields for different maturities. For instance if the 90-day T-Bill is at .2 percent and the 10-year T-Note is yielding 3.5 percent you have an up sloping yield curve as the long dated Treasuries are paying a higher yield then the short dated Treasuries. Usually you would also plot out the two year, five year, and thirty year along with the ninety day and ten year. This will give you a better picture for what the yield curve is really saying.

This is great but how do you use it to make money? Well the global macro investor knows that if the curve is sloped from the lower left to the upper right that things are looking good for the economy. If on the other hand it is sloping downwards the Fed has tightened and the economy is or will be slowing.

You may be asking yourself why this is. The reasons are actually fairly simple and straightforward. If the curve is steep, meaning the short term rates are low and the long term rates are high it means that banks are lending as they are able to borrow short term from the Fed and charge long term rates to their customers. Obviously when business is good for the banks, they will be lending as much as they can. This in turn spurs new business spending as money is available.

On the other hand if we have an inverted yield curve, where it slopes from the upper left to the lower bottom then banks will not lend as they are borrowing money at more expensive prices then they can loan it out for. This obviously curtails the credit markets and slams a break down on the economy. When this happens the Fed inevitably has to come in and lower rates to bring things back in line and help the economy grow again.

Think of bonds and interest rates as a teeter totter where yields are on one side and bonds are on the other. If bonds go down, rates go up. If rates go down, bonds are going up. In a regular inflationary environment this is always the case unless there is a severe credit quality issue.

So if you are a global macro investor that is using the yield curve you can forecast when to get in and when to get out of stocks and bonds based on the macro economy. At the same time you can use the information and trade currency differentials as well.

Of course as with all things in the market nothing works every time. In fact the quote history never repeats itself, but it often rhymes is a very appropriate statement. Used along with proper risk controls the yield curve can become one of the global macro investors best timing tools and economic gauges.