Chapter 11. Cashing in on Bonds

Continuing education is powerful. As you learn more, you are able to trade more products and do so with a greater level of success. I have traded bonds for 25 years, but my success level was not as great as I would have liked. I never had a strategy that allowed me to trade bonds often. Therefore, trading bonds was not part of my daily routine. Then, in early 2008, that changed when I read an article in Futures magazine. The article was about trading bonds and offered some helpful information. I took the ideas presented and merged them with my knowledge about the S&P and the markets. For the first time, I am enjoying trading bonds because I am consistently making money with the trade. Now bond trading has become a daily staple for me, and it is a steady moneymaker.

Bonds are debt instruments; that means they are interest rate sensitive. The buyer of the bond expects to receive repayment of his principal with interest. When interest rates move up, bond prices move down. For example, if interest rates are 5 percent and move up to 6 percent, bond prices drop. Who wants to buy a 5 percent bond if he can get one that pays 6 percent? Therefore, bonds carrying a lower rate must be sold at a discount. At the time of this writing, the Federal Open Market Committee (FOMC) has been lowering rates for months. While rates have been dropping steadily, bond prices have also been dropping. In a healthy economy, interest rates tend to rise as the economy grows, but ...

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