2.2.3.2. Trading U.S. Treasury Futures
When the economy strengthens, interest rates tend to rise. This is often because of three reasons.
1. Increased demand for loans (as the economy improves, demand for loans goes up, allowing lenders to charge higher rates)
2. Investors move into the stock market and out of the bond market, requiring bond issuers to raise their coupon rates to attract investors
3. The Fed may intervene to raise rates in order to slow down inflation
When the economy weakens, interest rates tend to fall, usually for the inverse type of reasons such as:
1. Decreased demand for loans (as the economy weakens, demand for loans goes down, causing lenders to lower their rates to attract borrowers)
2. Investors move into the safer bond market and out of the stock market, allowing bond issuers to lower their coupon rates
3. The Fed may intervene to lower rates in order to stimulate the economy
The movements of interest rates are inversely related to the prices of U.S. Treasury futures. When interest rates fall, the prices of U.S. Treasury futures rise. And when interest rates rise, the prices of U.S. Treasury futures fall.
|
Economy |
Interest Rates |
Treasury Futures Contracts |
Strategy |
|
Strengthens (↑) |
Increase (↑) |
Decrease in value (↓) |
Go Short Treasury Futures |
|
Weakens (↓) |
Decrease (↓) |
Increase in value (↑) |
Go Long Treasury Futures |
If a trader expects the economy to strengthen and interest rates to rise, the trader can short U.S. Treasury futures. If a trader expects the economy to weaken and interest rates to fall, the trader can purchase