Bond Yield : Market Selection and direction

Definitions

Market
Definition of market is not related to definition of stock exchange. For example United States market has NYSE and NASDAQ. but we will not distinguish between the two. For us it is American market.

Bond Yield
This article from Investopedia can give you better understanding of Yield https://www.investopedia.com/terms/b/bond-yield.asp

Each country is a marketplace but we group them into multiple marketplaces. It is good to consider group of marketplaces as well. For example US trade restrictions on Chinese import has impact on all Asian countries like China, Taiwan, South Korea. European Union trade agreement will have impact on all countries of EU.

1. Asian Market : HANGSENG, CCI, NSE
2. European Market : FTSE, DAX
3. American Market : NYSE, NASDAQ

Market selection is very easy choice if you are only working from within that market. But global traders have to decide where they want to trade. We have to decide where we are trading or inventing in. We decide that by using YIELD.

For US yield symbols are US10Y, US05Y, US15Y.

Fundamentals

Now how do we select. Lets say bond yield is increasing. Yield increase means interest rates are increasing. Yield has inverse relation to stock market. Yield has multiple impacts. The equation might be more complex or even beyond knowledge of modern day economics. But it is observed that every Yield is inversely proportional to stock market. And it should be obvious when we look at why it fundamentally true.

1. If investors are always on lookout for risk free investment opportunities. If they see yield is rising it indicates that they can make risk free money through government bonds or treasury bills. Cashflow will start moving into bonds and T-Bills.
2. The second impact is on revenue stream of companies itself. Rising Yield that is interest rate means companies have to pay more interest on their loan. Which reduced profit margin eps and quarterly forecast. Reducing valuation of company.
3. Most HNI and Prop desk traders rely heavily on borrowed money to create big positions using Futures and options. They start getting money on higher interest rate, since they also need to create higher returns than borrowing rates which are rising, they mostly reduce their positions or do not create very big positions. This causes liquidity crisis in stock market.

There might be more reasons that Yield might have on stock market. So lets say globally yield is on the rise. Then you will see all stocks markets are either in consolidation or bear cycle. If Yield is consolidating or falling it means stock market is going to rising.

Use

Now coming back to which market to selection and direction. You can use any momentum indicator to determine whether yield is rising or falling. EMA is one of the simplest one. If 10 DEMA is below 20DEMA and Yield is below 10 DEMA it is obviously falling interest rate and you can create long positions in market. You can go step ahead and check momentum using ADX. You can select market with highest ADX as the market to trade. Whether it is on short side or long side.