Trading Bond And Currency Funds
by Joe Duarte
Today's broad selection of different types of mutual funds allows traders to allocate assets based on
personal expectations of changes in the stock market, interest rates and currencies. S&C contributor and
newsletter publisher Joe Duarte presents his methods to increase gains in a portfolio by including
currency-based mutual funds as a choice for instruments.
Asset allocation has become a popular investment strategy. In this strategy, capital is usually divided
into stocks, bonds and cash, and capital is transferred from one category to another based on whichever
trading method the portfolio manager favors, technical or otherwise.
During periods of economic retrenchment, however, asset allocation models may have low returns
because portfolio managers choose to increase their portfolios' cash positions because they fear falling
stock prices. Recessions usually lead to lower interest rates, reducing a portfolio's cash portion return.
Often, during periods of economic weakness technical conditions favor taking the increased risk of
long-term bonds and foreign currencies to enhance the return on the cash portion of the asset allocation
VARIABLES AND VOLATILITY
Here's a review of the variables involved. Falling bond prices lead to higher bond yields. These rising
interest rates make a country's currency more attractive to traders. In our global fiat monetary system, a
government's promise to make its currency legal tender provides that currency's sole backing. The recent
European currency crisis illustrated this point well, as falling currencies led to extreme volatility in European bond and currency markets.
Bond market volatility, which usually reflects market participants' perceptions of a nation's political and
economic conditions, creates ample opportunity to trade in both bonds and currencies. By trading both
markets simultaneously when it is warranted, traders can enhance their profits by dividing their assets
between both sectors. In previous STOCKS & COMMODITIES articles, I have described different methods of
participating in the currency and bond markets via mutual funds. Here, I will describe a combination of
methods to create an interdependent trading system.