Why does the ZB react to the 6J

R

Ronjohn

Hi,

From what I understand the ZB will follow the 6J. What is the reason for this. Possibly because Japan is a big exporter? What else should I watch for when observing the ZB.

I know other factors are if the ZB or ZN are expensive or cheap.

Do you agree that the only way to trade Fixed income is with spreads? I personally like the idea of more short term trading. I would appreciate any feedback. Thank you
 
Ronjohn said:
From what I understand the ZB will follow the 6J. What is the reason for this. Possibly because Japan is a big exporter?
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6J is USDJPY futures (that is, USDJPY spot plus forward points to the expiry date, or in other words USDJPY spot plus some short term interest rate that barely moves). As with everything, the price of a currency is determined by supply and demand, which are strongly impacted by interest rate differentials (US and JP rates in this case). ZB is "30 year" US treasury bond futures; i.e. futures of long term US rates. Furthermore, both ZB and JPY react positively to risk off events (JPY is a major funding currency for carry trades). When shit hits the fan, carry trades unwind, and traders seek safe haven in US treasuries. Thus USDJPY and ZB are intrinsically linked and usually move similarly. Algos and traders make sure the stay linked. ZB does not follow 6J, they follow each other. You need to understand the carry trade and covered interest rate parity: investopedia.com/terms/c/covered-interest-rate-parity.asp.

Ronjohn said:
What else should I watch for when observing the ZB.
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Almost everything is linked. ZN GC 6J ES are a good start.

Ronjohn said:
Do you agree that the only way to trade Fixed income is with spreads?
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No. Spreads or outrights. Both.


Wise to stat away from ZB if just starting. Its a big and highly volatile contract.
 
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