Forex Market versus Bond Market

Forex Market versus Bond Market
Almost everyone who has had an investment account has invested in
the bond market. We feel confident saying this because, although
most people don’t know it, money market funds are part of the bond
market. If you have ever had cash in an investment account that was
not being used to buy stocks, mutual funds, and the like, your broker
probably put your money in the money market.
The bond market—money market funds, municipal securities,
Treasury securities, federal agency securities, corporate bonds, mortgage
securities, and asset-backed securities—is generally considered
to be a safe place to invest your money. Many even believe that you
are guaranteed not to lose any of your principal in the bond market.
While the bond market is certainly a conservative market and a great
place to put your money, it is not a guaranteed market. While the
likelihood is outrageously small, you could even lose some, or all, of
your principal by investing in Treasury securities or the money market.
And in any market in which there are no guarantees, there are
bound to be gaps.
Gap 1: Commissions Investors trade bonds through two markets:
the over-the-counter (OTC) market and the secondary market.
Bonds trade on the OTC market when they are first being issued. This
means that if you buy a bond on the OTC market, you are buying the
bond from the entity that will be paying you on the bond. Bonds
trade on the secondary market once they have already been purchased
and the person or entity that purchased the bonds wants to
sell them to someone else.
The bond market, with the exception of U.S. Treasury bonds
and notes—which trade on the Chicago Board of Trade (CBOT)—
does not have a central exchange. Instead, bond dealers and brokers
coordinate the sale and purchase of bonds through other bond dealers
Profiting with Forex 15
and brokers. To pay dealers and brokers for their services, bonds usually
trade at a marked-up price. This means that you’re going to pay
a little extra to purchase the bond you want. On top of that, dealers
and brokers may also charge an extra commission for unusual orders
just to make it worth their while.
You already understand the benefits of operating in the
commission-free environment of the Forex market, so we don’t
elaborate on that here. The same applies to all the gaps we discuss
throughout the remainder of this section. Unless we have something
more to add about an advantage of the Forex market regarding a
particular gap, we won’t repeat ourselves.
Gap 2: Market Hours The CBOT trades U.S. Treasury bonds
and notes on the trading floor each weekday from 7:20 a.m. until 2
p.m. CST and electronically each weekday from 6 p.m. to 4 p.m. CST
the following day. Keep in mind that while it is nice to have access
to the electronic market, most of the trading is done on the CBOT
trading floor during business hours.
The rest of the bond market, which does not operate on a central
exchange, can potentially operate on a 24-hour basis, but it usually
doesn’t. Most trading occurs during business hours because bond
dealers and brokers need to be in their offices in order to transact
trades.
Gap 3: Liquidity Bonds are usually quite liquid during business
hours. However, after business hours, liquidity can dry up quickly.
This can be problematic if something happens later in the evening
or during the night to affect the bond market. Prices will most likely
have changed significantly before the beginning of the next business
day, and you may be stuck with losses.
Gap 4: Taxes While the Forex market stacks up well against
some bonds with respect to tax issues, many bonds are far superior
to the Forex market when you are analyzing tax consequences. Many
bonds are issued as tax-free bonds, which means that you do not
have to pay taxes on any of your profits. The profits from U.S. savings
bonds can also be tax free if you use them for education.
Gap 5: Bear (Downtrending) Markets Defining a bear market
in the bond market is a subjective process. If you own bonds,
bear markets occur when bond yields go up. If you don’t own bonds,
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bear markets occur when bond yields go down. Abond yield is the
total return you are going to get on your investment during the life
of the bond. As the prices of bonds change, the bond yields also
change. The more expensive a bond is, the lower the bond yield will
be because you have to pay more for the same benefits. The less
expensive a bond is, the higher the bond yield will be because you
have to pay less for the same benefits.
When a bond’s yield is rising, it means that the price of the
bond is dropping. If you own the bond, this is bad news for you
because, if you had to sell your bond right now, you would get less
money than you originally paid for the bond and could end up losing
money on the transaction. However, if you were simultaneously
investing in the Forex market, you would be able to offset your losses
in the bond market with your gains in the Forex market.
Similarly, when the bond yield is dropping, it means the price
of the bond is rising. If you want to purchase the bond, this is bad
news for you because you will have to pay more for the bond than
you would have if you had purchased it yesterday. Again, simultaneously
investing in the Forex market can help you offset some of
the extra costs of buying a more expensive bond.
Gap 6: Analysis Overload The bond market offers many
varieties—money market funds, municipal securities, Treasury securities,
federal agency securities, corporate bonds, mortgage securities,
and asset-backed securities—of bonds to choose from. You can also
choose from myriad bond funds offered by virtually every mutual
fund family and investment bank. To make your decisions, you need
to know which ones offer tax advantages, which ones are no-coupon
bonds, when they expire, how frequently interest payments are disbursed,
what the yield to maturity is, and so on. On top of that, you
have to figure out the ratings scales for multiple-rating agencies.
Learning whether an “A” rating is better than an “Aa2” rating will
take some time and effort.
Forex Gap Bonds make it very easy to determine exactly how
much money you will make in the market during a given year. If a
$1,000 bond has an annual coupon (interest) rate of 6 percent, you
know you will receive $60 each and every year until the bond expires.
This is quite an attractive feature to people on fixed incomes and
those who know they have specific financial obligations they have
to meet.
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The Forex market is not as predictable. Because you have to
monitor the market and make individual decisions about your
investments, your returns are going to fluctuate. You certainly have
the ability to make a lot more money in the Forex market, but your
returns will certainly not be as predictable.
Most financial planners would suggest that you keep part of
your money in the bond market. This is good advice. You will have
to choose how you want to take advantage of the bond market—be it
through individual bonds or bond funds—but you should definitely
consider putting money in bonds. Of course, you shouldn’t invest in
any market without identifying how you are going to mind