Let's look at one scenario: Demand for bonds usually increases when investors are concerned about the safety of their stock investments. This flight to safety drives bond prices higher and, by virtue of their inverse relationship, pushes bond yields down.
As more and more investors move away from stocks and other high-risk investments, increased demand for "less-risky instruments" such as U.S. bonds and the safe-haven U.S. dollar pushes their prices higher.
Another reason to be aware of government bond yields is that they act as indicator of the overall direction of the country's interest rates and expectations.
For example, in the U.S., you would focus on the 10-year Treasury note. A rising yield is dollar bullish. A falling yield is dollar bearish.
It's important to know the underlying dynamic on why a bond's yield is rising or falling. It can be based on interest rate expectations or it can be based on market uncertainty and a "flight to safety" to less-risky bonds.
After understanding how rising bond yields usually cause a nation's currency to appreciate, you're probably itching to find out how this can be applied to forex trading. Patience, young padawan!
Recall that one of our goals in currency trading (aside from catching plenty of pips!), is to pair up a strong currency with a weak one by first comparing their respective economies. How can we use their bond yields to do that?
Read more: http://www.babypips.com/school/the-411-on-bonds.html#ixzz20p9fFnSv
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