Trading Interest Rate Futures

Trading Interest Rate Futures Shocking Secrets

23
Feb0

Win a FREE COPY of the High Velocity Market Master System ($2,997) that can trade stocks, forex, futures, options, commodities and ETFs by taking a quiz and also don’t forget to get your FREE COPIES of the Ultimate Day Trading System that can trade stocks, forex and futures and the Risk and Money Management Tool. Watch these Forex Training Psychology FREE Video Series by Todd Brown that reveal the secrets of Billionaire Traders. Take your Options Trading to the next level with the Options University Live Trading Labs. Anything that anyone does in the financial markets is based on interest rates. When interest rate increase, the cost of doing business increases and when interest rates are lowered, economic growth gets energized. The relationship between the rising and falling interest rates makes the markets in interest rate futures, Eurodollars and Treasury Bills, Notes and Bonds important for everyone including consumers, speculators, hedgers, economists, bureaucrats and politicians.

Bond market is at the center of the financial universe. US Treasury Bond Market is the most liquid and the most deep market in the world where almost all the investors and governments invest long term. However, with the emergence of the bond market in China and Dubai in this decade plus the development of the European Bond Market, the importanc of the US Bond Market might diminish a little. At the center of the US Bond Marke is the FED (Federal Reserve Bank). FED has the power to raise or lower the interest rates in the economy.

Now, as a trader and as an investor, you need to understand how the bond market, the rest of the financial market, the FED and the interest rate changes work out. This understanding can help you in your trading and investing endeavors.

FED has got two policy instruments at its disposal. The first policy instrument at its disposal is the FED Fund Rate. This is the overnight lending rate that the banks charge one another for meeting their stipulated reserve requirements. FED sets the Fund Rate. The other policy instrument is the Discount Rate at which FED lends money to insolvent banks.

Now how does the FED FUND RATE trickles down through the rest of the economy. Let’s see how it works. Suppose, FED is worried about the overheating of the economy and the rise in inflation. One of the primary jobs of the FED is to control inflation in the economy. So, the FOMC decides to increase the FED FUND RATE. This increase forces the banks and the credit card companies to increase their prime rates that they charge their best customers. Now, when bond traders sense an increase in the interest rates, they start selling their bonds in the market. This increases the market interest rates further. Auto loans and the home equity plus mortgage loans are tied with these bond benchmark rates, so they increase as well. So, you can see, how a chain reaction develops in the economy. This increase trickles down through the economy with a time lag that might be as long as from six months to more than one year.

So, if you want to profit from the changes in the interest rates, you can trade FED Fund Rate Futures that get traded on CME (Chicago Mercantile Exchange). These futures contracts are a pure bet on the FED decision making at FOMC. You can also trade LIBOR Futures. LIBOR means that London Interbank Offer Rate. This is the rate that commercial banks charge each other and is widely used all over the world as a benchmark. Another popular contract is the Eurodollars and the EURYEN deposits.