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Trading The 10-Year Treasury Note For Big Profits

February 23, 2012 | Comments: 0 | Views: 134

Definition of a treasury note

Basically, a 10-year treasury note is a marketable United States government debt security, with a fixed interest rate. Treasury notes can be bought through a bank, or directly from the United States government. Treasury notes are quite popular investments. There is a large secondary market which adds to their liquidity. Just for clarification, treasury notes have a term of more than one year, but not more than 10 years. Treasury bonds have a term of greater than 10 years.

Treasury yields are important

The yields are used to describe the amount of money you make on treasury notes or bonds. An important fact is that treasury yields go down when there is a lot of demand for treasury products. These products, for the most part, are considered ultra-safe investments.

Treasury yields are determined by supply and demand. When there is a lot of demand, a 10-year treasury note or bond will go to the highest bidder at a price above the face value. This will decrease the yield. The government will only pay back the face value plus the stated interest rate. Of course, if there is not a lot of demand, bidders will pay less than face value, which will increase the yield. That is why yields always move in the opposite direction of prices.

When treasury yields increase, the interest rates on fixed-rate mortgages will also increase. It will then become more expensive to purchase a home, so demand for homes decrease, and so will prices of homes. Of course, this will have a negative impact on the overall economy, and can also slow GDP growth. Over time, higher treasury yields can increase the value of the United States dollar.

How the economy moves treasury prices and yields

When the economy revs up, or shows strength, a 10-year treasury note, along with other notes and bonds, tend to go down in price. Of course, when prices go down, yields go higher. Prices are also influenced by domestic economic data, such as employment numbers, the growth of income, along with overall consumer and industrial prices. When data supports expectations of rising inflation, this will usually weaken note and bond prices.

The dollar effect

The U.S. Dollar has a direct effect on the economy, including commodities, and other important assets. A weakening dollar lowers the purchase price to foreign investors of U.S. Dollar denominated assets, such as 10-year treasury notes, and bonds. This can spur buying activity, and may increase the price of treasury notes and bonds.

Notes and bonds still viewed as safe-haven investments

For the most part, United States notes and bonds are still regarded as safe investments. They still often rally during times of international financial crises. Most investors, both here in the U.S. and internationally, still value the credit guarantee of the U.S. government. This gives 10-year treasury notes, and bonds, enough appeal when the credit quality of other countries, or borrowers crumbles. This was the main reason for the big rally in U.S. notes and bonds in late 2008, and early 2009.

Making big profits in the future

I believe it is only a matter of time before the enormous debt situation of the U.S. comes into the global spotlight. When this happens, 10-year treasury notes, and bonds, will most likely be sold in a very heavy manner. China is already beginning this process. Major global inflation will also play a major role in this selling mania. The key is to properly time this massive selling of notes and bonds. At that point, you can sell a straight futures contract, buy a put option, buy the right exchange traded fund, or stock.

Traders and investors with the proper knowledge are going to make fortunes as treasury notes and bonds go down in price dramatically. They will be shorting the bond market at just the right time.

Gary E Kerkow, founder of Tradingmarkets4u, is a stock and commodities market expert. He is a highly successful trader and instructor, with over 20 years experience.

Become a winner by following world-class trading recommendations.

Discover secrets of the world's best traders and investors.

Learn how to receive a "free special report" on my "Stock Of The Decade".

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Source: EzineArticles
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