Bond or we can call it debt (bond) is an agreement issued by an entity (entity) to get funds (money) of course to finance its business. This body itself can be from the government or the private sector. So when you buy a government bond (eg ORI), the government directly borrows money from you.
Maybe you think that this is the same as buying a stock but in principle it is different.
The biggest difference is that in a bond known as maturity, which means that the borrowed money must be returned 100% to you. And you will also get a number of interest (with a certain amount) called bond yield. And is paid in a certain period which is called a payment coupon.
Bond yield refers to the rate of return or interest paid to the bond owner. While the bond price itself is the amount of money spent to buy bonds.
Basically bond yield and bond prices have the opposite relationship. So, when the bond price rises, the bond yield falls and when the bond price falls, the bond yield rises.
Now, let’s now discuss the effect of bond yield on the forex market. Bond yield is a very good indicator to see the strength of a country’s stock market which means it relates to the demand for the country’s currency.
As a simple example, the bond yield in the US is a very good indicator of the strength of the stock market in the US. Thus this reflects the demand for US Dollar (USD).
Okay, so it’s clear how the effect of bond yield on the forex market, here is a simple example (this is an example in US, but it is the same if applied in our country).
The amount of demand for bonds (government or private) is usually caused by the number of investors who want to invest their wealth into low-risk investment instruments (low risk). And the increasing number of bond demands will cause more expensive bond prices which will ultimately reduce the bond yield that can be obtained.
The more investors who move away from high-risk investment instruments will increase the demand for low-risk instruments such as US Bonds and US Dollar safe heaven so that this low-risk investment will increase in price.
One of the things that must be really considered about government bonds, especially regarding the amount of bond yield, is that this is closely related to economic indicators, namely the interest rate or interest rate .
Some things that can cause this Bond Yield to rise and fall include the expected high interest rate, uncertain economic conditions, and high demand for low-risk investment instruments.
So after you know that the increase in bond yields will further increase appreciation of the currency and if we remember the basic principle of choosing a currency pair to trade that is pairing a strong currency against a weak currency, this bond yield is wrong. one indicator that can be used to see the economic condition of a country.