A1 Trading Company

Ticker tape by TradingView
The Art of Not Trading

With the holiday season lingering on and a new year on the cusp of arrival, traders may glance at the calendar and notice there is not much economic news to anticipate on Friday to cap off a light week. In situations like these where there can be lulls in bullish and bearish momentum due to a lack of fundamental catalysts, it can be helpful to remember that abstaining from trading is often its own discipline. With this in mind, let’s consider three ways traders can be productive during bouts of time where financial markets may not yield many trade setups. After all, the art of not trading is hard to navigate, but is essential for remaining profitable.

1) Rest

The Art of Not Trading

This may seem obvious or cliché at face value; however, guaranteeing meaningful rest for yourself is of the utmost importance when it comes to excelling in any skill. Just as athletes and manual laborers need rest days so that their muscles can adequately repair, time off from purely mental activities like trading is crucial for avoiding burnout and preventing recklessness. Besides simply making an effort to spend time away from the trading environment, ensuring a certain quality of rest can be quite helpful as well. Whether that means indulging in some extra sleep, spending time with old friends, exercising at the gym, or making time for an often-neglected hobby, good rest takes many forms for everyone. Whatever that happens to be for you, fitting restfulness into your lifestyle truly is an aspect of healthy trading, not a departure from it.

2) Backtest

The Art of Not Trading

Because trading is a game of risk management and probabilities, setting aside time for pouring over historical data can be of great benefit when it comes to exploring a strategy. Whether you are considering implementing a brand-new approach or polishing a formula you judge to be tried-and-true, subjecting any strategy to backtesting is always time well spent. For those interested in learning more about how to backtest, feel free to watch this video and much more from A1 Trading’s YouTube channel, and explore a selection of Metatrader Trading Software offered here.

3) Read

The Art of Not Trading

It often appears to be the case that many retail traders fall into the trap of over-relying on technical analysis over fundamental analysis. While reading charts and utilizing technical indicators can be incredibly helpful, it is important to remember that currencies, equities, and commodities are real things with actual value, and that their worth is not reducible to patterns on a screen. Investing your time in conducting fundamental analysis, such as reading up on the economic performance of the host country of a currency you trade or keeping up with news about the geopolitical tensions influencing a commodity’s availability, can be illuminating. By making an effort to understand the nuances of a particular currency pair or other asset, you may find that your biases as a trader grow more nuanced as well. For those interested in using a market scanner that offers supplemental fundamental analysis, the EdgeFinder is fantastic.

4 Pairs to Be Wary Of

As many of you already know, the EdgeFinder, A1 Trading’s market scanner software, can be incredibly helpful for discerning which securities are especially worth watching for potential trade setups. Whether you are planning on buying or selling a currency pair, commodity, bond, or more, EdgeFinder analysis is so robust that its ratings and biases can be a go-to supplement for traders. However, one feature of the EdgeFinder’s that is little mentioned, yet quite meaningful, is its generation of ‘0’ ratings and ‘Neutral’ biases. Most days, there are a small handful of pairs or securities that earn these reviews; rather than being irrelevant, these ratings can be quite convenient to keep in mind, as they can alert traders to risks in terms of lack of signals. With that in mind, here are 4 pairs to be wary of next week, as they currently earn such ‘0’ ratings, indicating that an extra measure of caution could be helpful.

1) GBP/CAD - Earns a ‘0’ Rating, or a ‘Neutral’ Signal

4 Pairs to Be Wary Of
Most institutional traders are shorting both GBP and CAD while Canada wrestles with low inflation and the UK contends with potential stagflation.

2) USD/CHF - Earns a ‘0’ Rating, or a ‘Neutral’ Signal

4 Pairs to Be Wary Of
Though most institutional traders currently favor USD over CHF, US Dollar bullish momentum remains in limbo while CHF retains safe haven status.

3) XAU/USD (Gold) - Earns a ‘0’ Rating, or a ‘Neutral’ Signal

4 Pairs to Be Wary Of
Gold warrants a similar commentary to that given for USD/CHF above. Uncertainty about the Fed's next moves makes this battle between safe havens complicated.

4) GBP/USD - Earns a ‘0’ Rating, or a ‘Neutral’ Signal

4 Pairs to Be Wary Of
Though this pair earned a 'Strong Sell' signal not too long ago (and well could again), GBP's historic rally amid the UK's return to fiscal responsibility currently offsets USD's myriad advantages over GBP.
Surprising PPI Numbers Today

This morning at 8:30 am Eastern Time, the Bureau of Labor Statistics revealed the latest figures for a key measure of inflation in the United States. The Producer Price Index (PPI), which tracks changes in the prices of goods and services sold by producers, was expected to increase by 0.4% month-over-month in October; instead, it only rose by a mild 0.2%. Likewise, Core PPI (which excludes volatile food and energy prices), was forecast to increase by 0.3% month-over-month, but remained static, changing exactly 0% instead. These surprising PPI numbers today offer yet another instance of American inflation dropping following the recent low CPI report, building a bearish case for USD and a bullish one for stock market indices as the need for a hawkish Fed ostensibly lessens. However, I am personally skeptical of this development as many underlying economic fundamentals have not changed, as we will discuss below.

Markets to Watch

My bias remains bullish on USD, and bearish on the US stock market, for three primary reasons: A) None of the crises the world is contending with have evaporated: an energy crisis still looms with winter around the corner, and many markets are still hot with artificial demand following quantitative easing mid-pandemic. B) The Democratic Party in the US, which tends to be seen as a pro-stimulus party, recently outperformed expectations in last week’s midterm elections, which I predicted could create short-term rallies in the stock market (but longer-term bullishness for USD). C) One month’s worth of data on inflation is not enough to mark a trend; October’s low numbers could easily be outliers, perhaps due to tapping into oil reserves to alleviate cost-of-living increases.

For those who remain bullish on USD and anticipate the Fed further hiking interest rates at a historic pace to quell high inflation, the following markets will be key to watch. They are listed below with their respective EdgeFinder ratings, signals/biases (which diverge from mine), and corresponding charts.

1) EUR/USD (Receives a -2, or ‘Neutral’ Signal)

Surprising PPI Numbers Today
Already struggling with double-digit inflation exacerbated by Russia's invasion of Ukraine, Europe's economic predicament could grow worse as winter approaches, likely increasing demand for energy and driving up oil and gas prices amid low supply.
Surprising PPI Numbers Today
Despite the strong breakout to the upside, key resistance has been encountered, and Keltner Channel walls suggest overbought conditions.

2) US30 (Receives a 4, or ‘Buy’ Signal)

Surprising PPI Numbers Today
Although the Dow Jones Industrial Average's month-long rally has been historic, most institutional traders are still going short.
Surprising PPI Numbers Today
On one hand, a year-long downtrend has been disrupted with a breakout to the upside. On the other hand, key resistance is near, around 34000.

3) USO (Receives a -5, or ‘Sell’ Signal)

Surprising PPI Numbers Today
Despite the strong downtrend, lower supply due to wartime conditions and OPEC+ restrictions on production, in conjunction with higher demand in wintertime, could cause prices to soar in the near future. Also, nearly 80% of institutional traders are still going long.
Surprising PPI Numbers Today
Although resistance was encountered at the 92 level, it appears an uptrend could be beginning to form.
Shocking US Inflation Data This Morning

This morning at 8:30 am Eastern Time, the United States Bureau of Labor Statistics revealed October’s Consumer Price Index (CPI; a proxy for inflation) numbers. Included in this report was month-over-month CPI, year-over-year CPI, and month-over-month Core CPI, which cuts out volatile food and energy prices. Rather than exceeding market expectations as USD bulls have become so accustomed to, last month’s inflation rather decelerated, and by large margins too. Month-over-month CPI was a meager 0.4%, a far cry from the 0.6% forecast, and month-over-month Core CPI only increased by 0.3% instead of 0.5%. The shocking US inflation data this morning is bearish for USD at face value, painting a picture of a US economy that is beginning to cool, implying less urgent need for Fed aggression while providing encouragement for stock markets.

Three Pairs to Trade

Despite this news, a bullish USD bias can still be meaningfully tied to fundamentals, because Fed Chair Powell made it clear that the Federal Reserve will not reduce rate hike goals based on one or two occurrences of lower-than-forecast inflation data. Thus, the bearish USD price action that arises from this news grants USD bulls potential opportunities for trade setups. With this in mind, here is a selection of pairs that the EdgeFinder, A1 Trading’s market scanner, still views favorably for USD bulls; they are listed below with their respective ratings, signals/biases, and corresponding charts.

1) USD/CAD (Earns a 6, or ‘Strong Buy’ Signal)

Shocking US Inflation Data This Morning
Shocking US Inflation Data This Morning

2) USD/CHF (Earns a 3, or ‘Buy’ Signal)

Shocking US Inflation Data This Morning
Shocking US Inflation Data This Morning

3) EUR/USD (Earns a -3, or ‘Sell’ Signal)

Shocking US Inflation Data This Morning
Shocking US Inflation Data This Morning
This Strong Currency May Surprise You

One of the main reasons why the EdgeFinder, A1 Trading’s market scanner, is so helpful is because of its ability to convey nuance when presenting analysis. For example, one currency pair may have strong bullish fundamentals while institutional sentiment somehow remains quite bearish, and the EdgeFinder is able to present this data concomitantly. This makes it even more compelling when the market scanner issues ‘strong’ buy or sell signals, indicating that a significant combination of fundamental, sentiment, and technical analysis have aligned for a pair. As of today, two new minor pairs have earned ‘strong sell’ signals; they share the same quote currency, and this strong currency may surprise you. It is the Kiwi Dollar, which has only recently been gaining bullish steam in the forex market. Boasting hot labor markets, strong GDP growth, high inflation, and a relatively hawkish central bank to match, New Zealand’s economy makes NZD seem quite promising. Institutional traders are only just now beginning to affirm this, with over 10% more of them going long on NZD than in the previous week.

Two Potential Pairs to Sell

The following two pairs are rated extremely favorably for bears, and for those planning to go long on NZD. They are listed below with their respective EdgeFinder ratings, signals/biases, and corresponding charts.

1) AUD/NZD (Earns a -9, or ‘Strong Sell’ Signal)

This Strong Currency May Surprise You
NZD currently beats AUD in every listed category.
This Strong Currency May Surprise You
October saw a steep breakout beneath key trendline support.

2) GBP/NZD (Earns a -9, or ‘Strong Sell’ Signal)

This Strong Currency May Surprise You
NZD currently beats GBP in every listed category.
This Strong Currency May Surprise You
This downtrend spans nearly two decades, as shown in the 1-Month timeframe above.
The Case Against the Pound

Today (Friday, October 14th) has been full of historic and turbulent decisions within the United Kingdom. Chief among them include the official end of the Bank of England’s (BoE) emergency bond-buying intervention scheme, as well as Prime Minister (PM) Liz Truss’ decision to fire Kwasi Kwarteng from his role as Chancellor of the Exchequer. He had only served in the position less than six weeks; his time in office is the second shortest ever for a Chancellor. With the UK’s economy now taken off of monetary policy life support, and a former foreign minister named Jeremy Hunt now appointed the new Chancellor, both the BoE and the PM are hoping for a fresh start. However, GBP bearishness only looks ever more compelling; let’s explore five crucial points of consideration as we evaluate the case against the Pound.

1) No More BoE Intervention

Towards the end of September, following the now-former Chancellor’s ‘mini-budget’ announcement that included debt-financed plans for energy bill subsidies and stimulus via tax cuts, GBP plummeted in value. The selloff saw the Pound reach never-before-seen lows against the US Dollar, nearing parity; to contain the selloff and prevent an implosion of the UK’s financial system, the BoE jumped into action. Buying bonds in order to inject new liquidity and project some semblance of economic optimism for wary financial institutions, the monetary rescue mission has worked, at least to an extent. However, this program ends today; now that the BoE is withdrawing its palliative aid, there is ostensibly nothing preventing another GBP selloff.

2) PM Truss’ Untimely Vision

While PM Truss may be nominally taking steps in a better direction, e.g., walking back certain tax cut provisions and appointing a new Chancellor, these gestures may be more tokenistic than substantive. This is because her whole underlying vision for the UK’s economy is incongruent with current circumstances: attempting to use fiscal stimulus to spur growth in the midst of 40-year inflation highs is almost nonsensical, contrasting both Keynesian and Austrian theories on economics. Even if she affirms a couple budgetary changes, there are few signs that she is relenting from expansionary policy in general, the key catalyst that prompted the GBP selloff.

3) UK Energy Insecurity

A central component of GBP’s bearish fundamentals is the energy crisis the UK is facing, similar to that of mainland European countries. The crux of this problem is that Britain’s shockingly high inflation rate, currently 9.9% year-over-year, is not just due to economic overheating post-stimulus, but is also caused by restricted energy supply and high global prices in the aftermath of sanctions with Russia. This supply-side problem cannot be fixed with hawkish monetary policy, forcing the UK’s government to choose between partially subsidizing energy bills with money printing, or potentially letting energy costs increase manifold, devastating consumers. Neither of these solutions can solve the underlying issue, and both contribute to Pound weakness.

4) Post-Brexit Instability

Another risky factor underpinning the fragility embedded within the UK’s financial system is uncertainty post-Brexit. With trade policy still in a state of flux upon leaving the EU, the UK’s economy was already in a delicate position in the eyes of potential investors. Now the UK is facing the same crises without the extra layer of financial security that comes with being an EU member, all while it is still finding its new footing on the world stage. Market sentiment may continue to assess that British equities, bonds, and the Pound are thus too risky to go long on, opting to further short GBP and other securities instead.

5) Empirical Forex Data

The Case Against the Pound

On top of these bearish fundamentals, institutional sentiment and market activity currently corroborate a bleak outlook for the Pound. According to the most recent Commitments of Traders (COT) data, 68.53% of institutional traders are selling GBP against other currencies, an increase of 4.55% over the previous week. Because financial institutions contribute significantly to price action and market volatility in forex, this institutional GBP bearishness has reflected in the markets accordingly. As depicted in the GBP/USD chart above, we have yet to see a breakout to the upside above trendline resistance on the 1-day timeframe (though a higher low has been found at the 1.10 level, before the bond-buying scheme finished).

A Grim Conclusion

The Case Against the Pound

From the standpoint of both fundamentals and sentiment analysis (as well as some technical analysis), a return to GBP bearish momentum seems quite plausible. While the fate of GBP minor pairs appears to be less clear, A1 Trading’s EdgeFinder tool, a market scanner that offers helpful supplemental analysis, rates GBP/USD at a -6, earning a ‘strong sell’ signal.

Key Takeaways

• Today has been historically significant for the UK’s fragile economy: the Bank of England’s emergency bond-buying program wraps up, and Chancellor of the Exchequer Kwasi Kwarteng has been fired. The case for GBP bearishness is quite a compelling one.
• First, the Bank of England’s quick monetary intervention to save GBP from collapsing ends today. With their policy efforts having briefly saved the Pound from dire sentiment and fundamentals, the primary measure of security for GBP’s value in forex is now gone.
• Second, while UK Prime Minister Truss has made some budgetary concessions, such as walking back the extent of her tax cuts, her underlying policy agenda is barely changed. Considering her vision was the catalyst for the GBP selloff, this is bad news.
• Third, the UK faces an energy crisis similar to that of mainland Europe, forcing the government to choose between debt-financed subsidies or devasting, near-unaffordable energy bills. Neither option is good for GBP, nor can be fixed by curbing demand via rate hikes.
• Fourth, the problems afflicting the UK’s precarious financial system are exacerbated by post-Brexit difficulties. Without the extra layer of economic protection brought by the EU, financial markets may judge GBP and UK stocks and bonds to be too risky to buy.
• Fifth, besides fundamentals, institutional sentiment and price action appear to confirm this bearish narrative for GBP. Over 68% of institutional traders are now shorting GBP against other currencies, and GBP/USD has yet to break out above key resistance.
• In conclusion, at best the Pound does not appear to be worth buying; at worst, market conditions look incredibly bearish for the currency, and for the UK’s economy in general. Currently, GBP/USD receives a ‘strong sell’ signal from the A1 EdgeFinder as well.

How to Trade the OPEC News

On Wednesday, October 5th, the multinational group known as OPEC+, which consists of the OPEC member countries plus a selection of non-member allies (including Russia), made a shocking and controversial move. They decided to collectively scale back their oil production, which currently amounts to approximately 40% of the world’s supply, by 2 million barrels per day, or 2% of global output. This policy agenda comes on the heels of several months of declining oil prices, with brent crude oil falling below $95 a barrel from this recent summer’s highs around $125 a barrel. As the Economist describes, this organization operates in a manner comparable to an international central bank, with the goal of keeping oil and gas prices high and stable. These production cuts will surely be felt by consumers and investors around the world, which is why we ought to discuss how to trade the OPEC news.

What Exactly is OPEC?

The Organization of the Petroleum Exporting Countries, or OPEC, is an intergovernmental organization that plays a weighty role in influencing oil and gas prices on an international scale. Consisting of thirteen member countries which meet regularly, not only do they contribute well over a third of the world's oil supply, but they also own over 75% of the world's oil reserves. OPEC+ also includes ten additional countries which participate in OPEC’s plans, and whose sizeable global authority grows exponentially larger amid an energy crisis, particularly one primarily created by Russia, an OPEC+ participant.

Why Are These Output Cuts Significant?

These cuts, which could likely become more severe than expected given OPEC+’s reputation for failing to meet production goals, guarantee a smaller energy supply available within the global markets short-term, which necessarily creates higher oil and gas prices. This reduced supply and higher prices could not come at a worse time for many internationally speaking: European countries are already grappling with the consequences of underdeveloped energy sectors due to years of reliance on Russian exports, and many lower income countries are struggling under the burden of painful US Dollar-denominated debts and energy prices. This is a devastating economic blow to billions of people around the world, and it will reflect as such across financial markets.

Could Rising Oil Prices Be Mitigated?

Unfortunately, there does not appear to be much that can be done in the short-term to resolve this situation, at least on a multinational level. US President Biden announced a plan to release 10 million more barrels of oil from the US Strategic Petroleum Reserve in the month of November, in addition to the 180 million barrels already released since Spring of this year. While this may help cushion some of the initial blow for consumers, it is purely palliative, and unsustainable given the reserve’s limitations and the potential longevity of this energy crisis. Norway, now the EU’s largest supplier of gas, announced plans to use ‘joint tools’ to boost exports for Europe amid crisis, but precise details about this arrangement are currently few. It could take a grueling amount of time for the world’s countries to expand energy grids and develop diplomacy strategies to mitigate damage.

How Have Forex Fundamentals Changed?

Due to oil’s now artificially exacerbated scarcity, and its aforementioned effects on various economies, this news has certainly influenced market fundamentals, including within the forex market. For commodity traders, fundamentals appear to be quite bullish for US Oil into the near future and may continue to be so until global oil output returns to previous levels. For those trading currency pairs, this news is likely bullish for the Canadian Dollar, a ‘commodity currency’ since oil and gas production and exports are central for Canada’s economy. By contrast, this news offers further bearish potential for the Euro, since this current energy crisis has been catalytic in sending EUR to historic lows against other currencies, especially USD.

Three Trading Possibilities

The EdgeFinder, A1 Trading’s market scanner tool which offers traders holistic supplemental analysis for a variety of pairs and securities, corroborates the fundamentals mentioned above. The following three possibilities are viewed favorably for traders, and are listed with their respective ratings, biases/signals, and a chart which lists the specific factors the EdgeFinder takes into account.

A) USO - Earns a 7, or ‘Strong Buy’ Signal

How to Trade the OPEC News
How to Trade the OPEC News

B) EUR/CAD - Earns a -2, or ‘Neutral’ Signal (personal sell bias)

How to Trade the OPEC News
How to Trade the OPEC News

C) EUR/USD - Earns a -7, or ‘Strong Sell’ Signal

How to Trade the OPEC News
How to Trade the OPEC News
3 Surprising Pairs to Buy

Many retail traders are likely aware of how US Dollar strength has surged to decades-long highs over this past year. This is primarily due to the Federal Reserve’s hawkishness in response to staggering increases in the cost of living, as well as USD safe haven status as the world teeters on the brink of a global recession. While major pairs such as GBP/USD and EUR/USD are particularly popular for those aiming to go long on USD, there are other promising, less frequently traded pairs that are worth watching as well. Here are three such USD pairs to consider, all of which are viewed favorably by the EdgeFinder, A1 Trading’s market scanner software. These 3 surprising pairs to buy are listed in order of favorability, i.e., their respective EdgeFinder ratings and biases, along with some additional technical and fundamental analysis.

1) USD/CAD (Earns a 5, or ‘Buy Rating)

3 Surprising Pairs to Buy
3 Surprising Pairs to Buy

This pair is a bit unique in terms of fundamentals, because a portion of Canada's economic performance is predicated on exporting energy to the US, a primary trading partner, knitting their economies together. Regardless, the US economy has remained far hotter than Canada's, which reflects accordingly in the COT data above, as institutional traders clearly favor USD over CAD. Price action is retesting the lower depicted zone as support following a stunning breakout to the upside of trendline resistance in September.

2) USD/TRY (Earns a 5, or ‘Buy’ Rating)

3 Surprising Pairs to Buy
3 Surprising Pairs to Buy

This pair is an unusual case that might spook newer traders; after all, wouldn't fundamentals favor the currency with the higher interest rate, and high inflation to match? However, that has not been the case here as Turkey grapples with horrific stagflation, much of it due to the Lira's near collapse in value. Turkey's interest rates have not been allowed to rise accordingly in order to mitigate hyperinflation, sending this pair to historic highs. It appears a breakout to the upside of resistance may be occurring.

3) USD/ZAR (Earns a 4, or ‘Buy’ Rating)

3 Surprising Pairs to Buy
3 Surprising Pairs to Buy

South Africa's economy is one of Africa's strongest, having grown rapidly over the past few decades post-Apartheid. However, many structural problems remain, including an unemployment rate exceeding 30%. Similar to USD/TRY's fundamentals in a sense, this is another case where interest rate divergence is not as compelling for forex traders, since South Africa's economy is not overheating in a comparable way to the US. It appears that recent price action may have found a key support zone prior to trendline support.

Even More Bullish USD News

This morning at 8:30 am Eastern Time, the United States’ Bureau of Economic Analysis released even more bullish USD news. The Core Personal Consumption Expenditures (PCE) Price Index, which measures changes in prices for consumers (excluding volatile food and energy prices), rose more than expected month-over-month. A 0.5% increase was expected for August, with 0.6% being the result today; while a 0.1% margin may not seem incredibly significant at face value, it is especially noteworthy because this is the Federal Reserve’s favorite measurement of inflation. This will likely further embolden the Fed in their assumption that more interest rate hikes are necessary to cool a severely overheated US economy.

Best Pairs to Trade

The following pairs are ranked by the EdgeFinder, A1 Trading’s market scanner tool that provides supplemental analysis, as optimal pairs to watch for those who are bullish on USD. They are listed below with their respective ratings and biases, as well as some additional fundamental and technical analysis.

1) EUR/USD (Receives a -6, or ‘Strong Sell’ Signal)

Even More Bullish USD News
Even More Bullish USD News

As can be seen in the line items given for the EdgeFinder score summary above, the US Dollar beats the Euro in all listed categories except retail sentiment and GDP growth, with GDP growth being the Euro's only advantage. Sadly, this will likely not last long due to Europe's energy crisis, which has been exacerbated by this week's mysterious Nord Stream pipeline damage. This pair is on the verge of retesting both trendline and parity resistance, which could prompt a continuation of the downtrend.

2) GBP/USD (Receives a -5, or ‘Sell’ Signal)

Even More Bullish USD News
Even More Bullish USD News

Most of the categories listed above favor USD, while the Pound does have the upper hand in both GDP growth and unemployment. However, these two apparent victories for GBP are not what they seem, as the launching of UK Prime Minister Truss' growth-focused fiscal stimulus ambitions prompted a historic near-crash of the Pound earlier this week. Coupled with the Bank of England's subsequent dovish intervention and recent lukewarm efforts to mitigate inflation, there is little favoring GBP in terms of fundamentals. As with EUR/USD, a retest of resistance seems likely before the downtrend resumes.

3) USD/TRY (Receives a 5, or ‘Buy’ Signal)

Even More Bullish USD News
Even More Bullish USD News

All listed categories besides GDP growth and interest rate divergence favor USD. While these two factors favoring the Lira seem particularly significant, these line items are recontextualized in light of the tragic stagflation and hyperinflation that Turkey is contending with. With an astonishing 80% annual inflation rate, and unemployment over 10%, a 12% interest rate and recent positive Turkish GDP growth are sadly not enough to stop the Lira's crisis from transpiring. It appears we may see a breakout to the upside for this pair, followed by a potential retest of the 18.5 level as support.

When (and How) to Buy Treasuries

This past year has been distressing for economies and markets around the world. From limited supply amid war, geopolitical tensions, and environmental disasters, to scrambled supply chains post-COVID, to flooded money supplies following unprecedented degrees of economic intervention, high inflation has ravaged many countries, and the US is no exception. Given the erratic market behavior that comes courtesy of economic crises, traders and investors may be hunting for safer securities to keep their money in. For those who are looking for the most stable financial assets available, US Treasuries often make the top of the list. Let’s explore when (and how) to buy Treasuries.

What Are Treasuries?

‘Treasuries’ is an umbrella term that refers to many kinds of debt securities for sale via the US Department of the Treasury. Available in short-term T-Bills, 2-to-10-year T-Notes, and 30-year T-Bonds, they are a type of financial asset that enables investors to effectively lend money to the US federal government for a set duration of time and receive a fixed rate of interest in return. Another prominent kind of Treasury are Treasury Inflation-Protected Securities (TIPS), which indexes your money to the rate of inflation in the US.

Why Purchase Them?

Owning Treasuries comes with a variety of benefits that can seldom be found elsewhere among financial assets. Perhaps the greatest perk is extremely low risk, since your purchase comes with a guaranteed return for those holding until maturation, quite different from most financial markets where traders must fend for themselves in terms of risk management. Another factor that minimizes risk is the financial stability of the US federal government, for which bankruptcy is ostensibly impossible.

Are There Downsides?

While there are unique perks to opting for Treasuries over other securities, there are built-in disadvantages as well. For those planning on holding onto a Treasury until it matures, perhaps the most noteworthy is the additional risk of inflation diminishing one’s real rate of return, since inflation is a dodgy phenomenon that cannot be anticipated perfectly.

Combined with frequently low yields on Treasuries the past few decades, there is always a chance that inflation could completely negate the income’s new purchasing power. Additionally, for those who may want to sell a Treasury before its maturation date, there is a significant degree of ‘interest rate risk’ since the security likely won’t have an identical market value to when it was first purchased.

When Are Yields Highest?

If earning passive income is the goal (rather than simply protecting purchasing power via TIPS), timing matters a great deal for the sake of purchasing Treasuries at an optimal price, i.e., receiving a meaningful yield. Historically, higher Treasury yields often correlate directly with a higher federal funds rate (which is intentional, not coincidental), with the 10-Year T-Note yielding over 10% annualized interest in the late 1970s and early 1980s. The more the Federal Reserve raises interest rates, the higher yields are likely to be; considering how hawkish the Fed has recently become to quell high inflation, substantial yields could be around the corner.

How High Could They Go?

If inflation remains a persistent threat, enough for the Fed to continue hiking interest rates according to their most recent projections, the federal funds rate might be raised to a range between 2.9% and 4.4% in 2023. If the fed funds rate does surpass 4% for the first time in over a decade, this may well correspond with the 10-year Treasury doing the same, presenting lucrative buying opportunities for those interested in waiting out high inflation for a longer-term maturation period. It could even be the case that the Fed must hike rates even more severely, in which case Treasury yields could become far greater than currently expected. Currently, the EdgeFinder market scanner rates the US 10-Year and 30-Year Treasuries as a 5 ('buy') and a 6 ('strong buy'), respectively.

Ways to Buy

Anyone may purchase US Treasuries from the US Treasury Department via the TreasuryDirect website, at recurring auctions you can track throughout the year. However, one may also buy or sell Treasuries through a variety of banks, brokers, and exchange traded funds (ETFs).

Takeaways

• In times of market turmoil amid economic uncertainty, it can be helpful to consider safe securities to invest in. Among these options, US Treasuries historically reign supreme.
• There are several different kinds of Treasuries which have different maturation lengths, including T-Bills, T-Notes, T-Bonds, and TIPS (which are indexed to inflation).
• US Treasuries are debt securities backed by the US federal government. They enable buyers to lend money to the US government in exchange for fixed interest payments.
• There are certain benefits to owning Treasuries that are quite rare for financial assets. Chief among them is a near absence of risk, as fixed interest payments guarantee specific returns and the chances of the US federal government going bankrupt are near-zero.
• However, there are downsides to owning Treasuries too. Perhaps the biggest risk for those holding on until maturation is that the severity of inflation will impact the real rate of return.
• For those who may want to sell a Treasury before maturation, there is ‘interest rate risk’: the Treasury’s new market value may have depreciated from the time it was purchased.
• Thus, to maximize income from Treasuries, it is helpful to wait until Treasury rates are optimal. Historically, the higher the US federal funds rate is, the better Treasury yields will be.
• Depending on how high the Federal Reserve sets the fed funds rate, it is possible that the 10-Year Treasury yield could cross well above an annualized rate of 4% for the first time in over a decade. This rate could potentially far outlast high inflation, bolstering returns.
• While all kinds of Treasuries are available directly through the TreasuryDirect website at recurring auctions, they are also available for purchase through brokers, banks, and ETFs.

Home
Edgefinder
VIP
Menu
homesmartphonelaptopmenu linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram