c11 JWBT016-Busby September 30, 2008 14:18 Printer: TBD
CHAPTER 11 Cashing in on Bonds
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ontinuing 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 inFuturesmagazine.
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 exam-
ple, 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 per-
cent? 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 our economy has not been robust
lately and that fact is reflected in our interest rates and prices in the bond
market.
Bonds tend to move inversely to stocks. One example of this can be
seen on May 2, 2008. The morning began with the release of employment