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Treasury Bills (T-Bills) and their Correlation with Equity and Forex Markets

Any investor must keep a close eye to what happens in the bonds market. Significant changes in the pricing of government and/or corporate bonds can be used as an indicator of upcoming economic transitions. In this context, significant changes in the yield of government bonds or changes in the spread between different-maturity bonds may forecast what is about to happen in the real economy, in the equity markets and in the Forex markets. Actually there is an important factor linking every financial market and that factor is the level of interest rates.

Government Bonds Classification

Government bonds, in general, are classified according to their maturity. There are the three (3) main categories:

■ Bills –Maturing in less than one year

■ Notes –Maturity in 1 to 10 years

■ Bonds -Maturing in 10 years, or more

The marketable securities are issued as Treasury Bonds. Based on the length of their maturity they are called Treasury Bonds, Treasury Notes or Treasury bills (T-bills).

Treasury bills (T-bills)

Treasury bills are short-term securities with a maturity of less than one year that are sold in the US in denomination of one thousand dollars ($1,000). The maximum purchase can be 5 million dollars. Maturities differ:

  • 4-week T-bills that are offered each week, the bills are auctioned the following Tuesday
  • 13-week and 26-week bills are offered each week, the bills are auctioned the following Monday
  • 52-week bills are offered each month, the bills are auctioned the following Tuesday

T-bills and their Auctions

The US Treasury sells Treasury bills (1-month, 3-month and 6-month) at weekly competitive auctions. The final price is determined by the demand and the supply. Here is a link with dates of upcoming T-Bills auctions and the results of recent T-Bills auctions:

» http://www.treasurydirect.gov/instit/instit.htm?upcoming

T-Bills Pricing

T-bills are issued via a bidding process and are offered at a discount. They don’t pay a fixed interest like common government bonds. Instead, the appreciation of the bond at maturity provides a return to the holder. T-Bills are priced the same way as Zero-Coupon Bonds. The final interest rate earned by holding a T-bill is equal to the appreciation of the security (difference between the initial price and maturity value) divided by the maturity value.

T-bills with longer maturities provide higher returns than shorter-maturity issues. Usually, a 6-month T-bill will be priced lower than a 3-month T-bill. That difference in the offered price generates higher returns on behalf of longer-maturity T-bill holders.

Factors affecting the Pricing of T-Bills

Treasury bills are tradable securities and their price fluctuates the same way as any other tradable debt security. Many different economic and non-economic factors influence the T-bills pricing, here are the most crucial, of those, factors:

(1) The FED monetary policy can highly affect the T-bill prices. If FED decides to raise the federal funds rate will cause the price of T-Bills and other government securities to fall. The drop in T-Bills price will keep on until the rate return on T-bills is matching the new federal funds rate.

(2) The FED is also a buyer of government debt securities. Therefore when the Fed performs expansionary monetary policies, the price of T-Bills tends to rise. The exact opposite will happen if the FED decides to sell government securities.

(3) T-bills are considered as an extremely secure investment as they are backed by the full faith of the government. Therefore when other investments become risky, investors see T-Bills as a safe-haven for their money. On the contrary, T-bills price drops when other investments become less risky and the economy is found in expansion.

(4) The level of inflation affects also T-Bills pricing. This is happening as inflation shrinks the real return rate of T-Bills and thus making investors to move to higher-return choices by selling government securities. Furthermore, when inflation rises it is highly probable that FED interest rates will go up too. In overall, the T-Bails price drops during inflationary periods.

(5) There are other (non-economic) factors that may influence the price of T-Bills, and that includes changes in market’s psychology, political risk, war, etc..

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Introduction to the Foreign Exchange Market -Forex Trading Guide

The Foreign Exchange (Forex) Market is the largest Financial Market in the world with daily volumes of about 4 trillion USD. The Forex Market is a purely decentralized global market where world currencies are traded one against another in a 24-hour basis, from Monday to Friday (24/5)The Foreign Exchange (Forex) Market is the largest Financial Market in the world with daily volumes of about 4 trillion USD. The Forex Market is a purely decentralized global market where world currencies are traded one against another in a 24-hour basis, from Monday to Friday (24/5).

 

Short History of the Foreign Exchange Market (Forex)

After the end of world war two, the Bretton Woods Agreement (1944) became a global rule. According to that agreement, the exchange value of a country’s currency was fixed and equal to a particular quantity of gold. As the Bretton Woods Agreement ended during the 70s, the current Floating Currency System was introduced. According to the Floating System, the value of every currency rises or falls according to the market demand and supply. In 1971, the CME (Chicago Mercantile Exchange) was the first exchange offering currency trading within the International Monetary Market (IMM). After 1990, the revolution in Informational Technology provided the framework of a new Forex Market, the Online Forex Market. Today there are many hundreds of Online Brokers in the world. Forex Brokers are divided into three main categories:

(1) ECN Brokers

(2) STP Brokers

(3) Market Makers 

The Interbank Currency Market

The Interbank market is a large market where large banks are executing currency transactions. Other participants than large banks are obligated in paying high fees in order to trade currencies. The Interbank market is also called as the Institutional Forex Market.

Most Traded Forex Currencies

The most traded Forex currencies are the USD (United States dollar), EUR (Euro), JPY (Japanese yen), GBP (Pound Sterling), AUD (Australian dollar), CHF (Swiss Franc), CAD (Canadian dollar) and NZD (New Zealand dollar).

Forex Market Participants

Forex incorporates many different types of participants like large and small banks, central banks, retail and institutional traders and Forex brokers.

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CFTC's Commitments of Traders (COT)

The Commitments of Traders (COT) is an important report issued by the CFTC that shows the aggregated long and short positions in the futures market regarding all major asset classes including Forex currency pairs.

The COT is considered an important indicator for analyzing market sentiment and future market conditions, especially as concerns the positions of non-commercial traders.

What is the COT (Commitments of Traders (COT) Report?

The Commitments of Traders or COT is a weekly report which measures total holdings of commercial and non-commercial participants in the US futures market. The COT report was firstly issued in 1962 incorporating 13 popular agricultural commodities. Originally the report was released in a monthly basis bust starting from the year 2000 it is released on a weekly basis. The COT report is available for all actively traded Futures contracts such is stock indices, interest rates, and currencies.

The Commitments of Traders includes a breakdown of the total futures positions of 3 different market participants:

(1) Non-Commercial traders / large speculators

(2) Commercial Forex traders / hedgers

(3) Small speculators (too small to be reported)

There are COT reports for many different asset classes including:

(a) Stock Futures (equity investors)

(b) Commodity Futures (precious metals, energy, etc)

(c) Currency Futures (including US Dollar against Euro, Japanese Yen, British Pound, Canadian Dollar, Swiss Franc, Australian Dollar, Mexican Peso, Russian Ruble)

Related Links:

CFTC General Commitments of Traders Pagehttp://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm

CME Group Currency Futures COT Pagehttp://www.cmegroup.com/trading/fx/cftc-tff/main.html

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Arbitrage trading is an automated trading strategy that aims to exploit inefficiencies in the pricing of a financial assetWhat is Arbitrage Trading?

Arbitrage trading is an automated trading strategy that aims to exploit inefficiencies in the pricing of a financial asset. Arbitrageurs trade the same asset on two different markets by opening two opposite positions (one Short and one Long). An effective arbitrage strategy does not include any market risk and offers small risk-free returns.

Arbitrageurs are working in favor of the market and retail traders as they push quotes to be more efficient, and at the same time, they add significant liquidity to the system.

Example

Suppose the share of an airliner called BlueLines trades simultaneously in London and the New York stock exchanges. The spread between bid and ask in both markets is 20 points. When there is a difference in BlueLines pricing between New York and London that exceeds these 20 points, an arbitrage opportunity is emerging.

If you buy and sell the same amount of BlueLines in both markets the trade is risk-free. When both positions are opened you just have to wait until the pricing of BlueLines comes back into sync. When that happens both positions may close and a risk-free profit is realized.

 

 

Cross-Broker Arbitrage Strategies

Here are two common Cross-Broker Arbitrage Strategies:

(i) Speed-Arbitrage Strategy

The arbitrageur can use specialized automated software that exploits differences between the quotes of a slow market maker (dealer) and a fast ECN broker. The arbitrageur executes only one trade, this trade is executed on the slower broker. The trade remains opened until an opposite arbitrage situation occurs. When the opposite arbitrage situation occurs then the trade may close with a profit.

-Requires a common MT4 Account (Slow Broker) and a Demo Mt4 Account (Fast Broker)

-Your Server (if using VPS) must use the Same Data Center Location as the Slow Broker

-It is Efficient Strategy for News-Trading Periods and for major Price Breakouts

(ii) Hedging Arbitrage Strategy

The arbitrageur by using specialized automated software seeks differences in spreads between two brokers and then executes trades on both brokers. A position is opened in one broker and the opposite same-sized position to another broker. One position hedges the other. The trade remains opened until an opposite arbitrage situation occurs. When the opposite arbitrage situation occurs then the trade can close with a profit.

-Requires two FIX-API Accounts

-Both Brokers and your Server must use the Same Data Center Location

Note: FIX means Financial Information eXchange and it is a trading technology offering faster execution, anonymity and better liquidity.

 

Avoiding Problems with Forex Brokers

The arbitrage activity is likely to be forbidden by your broker. These are some tips to avoid any problems:

(i) Trade using more than one arbitrage accounts

(ii) At least one month before starting your automated arbitrage strategy trade manually on a daily basis or trade via a common Expert Advisor (Forex Robot) using the same currency asset as for your arbitrage trading strategy.

(iii) Keep your arbitrage trading activity no more than 1/4 of your total trading activity in any individual account.

(iv) Make sure your broker does not apply an anti-arbitrage plugin in your trading account.