You're not alone if you were shocked by the recent one day-four point drop in bond prices but you should gain a greater understanding of what moves the bonds from this segment and what DV01 tells us. This segment introduces something that even experienced traders may not know.
The segment began with a mention of the upcoming tastytrade documentary about Lewis Borsellino and Pete shared some of his personal thoughts and recollections of the trader who was the self proclaimed largest local in the S&P pit. The guys then got down to business.
Bonds are a different animal and react differently than stocks, options or currencies. You can’t control your risk unless you understand what drives the market and controlling risk begins at order entry.
Short-term interest rates are at their year highs; the market might be pricing in an upcoming interest rate change. Long term rates are impacted by the shorter duration bonds, but are set by the market. A graph was displayed showing the current yield curve and all yield curves since January 2015.
Pete reminds everyone of the reverse relationship between bond yields and prices. He explains the concept of real interest rates as compared to nominal rates and how this influences bond prices. He explains what can move the bonds when the market doesn’t expect a move in short term rates.
Pete ends by introducing us to a new tool, the Dollar Value of a Basis Point (DV01). This is a quoted number similar to option delta. It can tell us how much a bond’s price will change in response to a rate increase. Pete shows how to use it and tells us it can be found on CMEGroup.com. The segment ended with some talk about how much of the move in bonds has already been factored in by the markets.
Watch this segment of “Closing the Gap-Futures Edition” with Tom Sosnoff, Tony Battista and Pete Mulmat to learn all about what moves the Bond market and a tool that can help you understand what the market expects.
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