How to Overlay Bond Yield Spreads on a Currency Pair Chart in TradingView
We have a quick question here from Tom, who asks how he can get a bond yield spread for two currencies to overlay on a currency pair chart in TradingView. He also adds that he has tried to do it, but for some reason, the scale of the chart comes out all messy, and he just wants some advice on how to do it. Firstly, thanks for the question, Tom.
The good news is I know well, I think I know exactly what is causing your scaling issue, and the even better news is that it’s really very simple to solve and will only take you a couple of seconds. Now before I go into the actual chart setup, just a quick look at why we look at bond yield spreads between currencies in the first place.
Understanding Bond Yield Spreads
So firstly, what is a bond spread? A bond spread simply refers to the spread or the difference in the yields of the same maturity for two currencies. For example, we will look at the spread or the difference between the bond yields for, let’s say, the US ten-year bond yield and the Japanese ten-year bond yield when we look at something like the USD/JPY currency pair. If we were to look at the AUD/JPY or the AUD/NZD currency pair, we would look at the Australian ten-year bond yield as well as the New Zealand ten-year bond yield, and basically the difference between those two.
Why Use Bond Yield Spreads?
Why do we bother using bond yields or the spread? Currencies are usually correlated to interest rate expectations. This means that if markets think that interest rates will rise, that should be positive for a currency. Conversely, if they think that interest rates will fall, that should be more negative for a currency. Now, I say “usually” because there are, of course, many other factors that could still see a currency depreciate even if interest rates go higher, and factors that could still see a currency appreciate even if interest rates go lower.
As currencies are generally correlated to interest rates and interest rate expectations, and as bond yields reflect interest rate expectations, investors generally use the spread or the difference between the bond yields of various countries as a possible leading indicator of where the exchange rate might be going. Again, there are many other factors that impact exchange rates apart from just the bond yield spread, so keep that in mind.
Example of Bond Yield Spreads as Indicators
Generally speaking, if we overlay the ten-year yield of one currency with the ten-year yield of another, if we take that spread or the difference, especially the later duration bond yields like the ten-year, that should give us a fairly close correlation to what is happening with the exchange rate. The bond market is usually very accurate with pricing in turns or potential turns in overall interest rate expectations, and it can sometimes act as a leading indicator for where price might be going.
A good example is the EUR/USD. If we quickly open up a EUR/USD chart and go to the daily timeframe, adding in the ten-year bond yields for Germany and the US, we see a clear pattern. In 2017-2018, the bond yield spread between Germany and the US started to move lower, leading to an initial move lower in the EUR/USD exchange rate. As the bond yield spread continued to decline, the exchange rate followed suit, highlighting the bond market’s role as a forward-looking indicator.
How to Overlay Bond Yield Spreads in TradingView
With that in mind, let’s quickly take a look at how we add this to the chart. We’ll use USD/JPY as an example. Here’s a step-by-step guide:
- Open your currency pair chart: In this case, we’ll use USD/JPY. You can choose any timeframe, but for clarity, a shorter timeframe like one hour can show fluctuations more clearly.
- Add the Bond Yield Spread:
- Click on the “Compare” option in TradingView.
- Make sure to select “Add Symbol” and not “Compare”. This is crucial as selecting “Compare” can lead to scaling issues.
- Enter the bond yields as a formula: US10Y – JP10Y. Ensure you start with the bond yield of your base currency (in this case, the US ten-year yield) and subtract the bond yield of the quote currency (the Japanese ten-year yield).
- Enter the Formula:
- Type the formula directly into the search bar and press Enter. Do not wait for the search bar to provide an option, as it will not recognize the bond yield spread directly.
- Overlay the Main Chart:
- Ensure you have the “Overlay the main chart” button ticked. If you don’t, the bond yield spread will appear in a sub-chart. If this happens, you can drag the bond yield spread onto the main chart.
This method should resolve the scaling issue you were experiencing, Tom.
Conclusion
Overlaying bond yield spreads on currency pair charts can provide valuable insights into potential exchange rate movements, acting as a leading indicator in many cases. By following the steps outlined above, you can easily add bond yield spreads to your TradingView charts without encountering scaling issues.
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