Bond futures and interest rates have an inverse relationship. When interest rates go up, bond futures prices usually go down. When interest rates fall, bond futures prices rise. This happens because bond prices and interest rates move in opposite directions. Traders use bond futures to manage interest rate risks and to predict future changes in rates.
Why Do Bond Futures Fall When Interest Rates Rise?
When interest rates rise, new bonds offer higher returns. This makes older bonds with lower rates less valuable, so their prices fall. Since bond futures are based on the price of bonds, the futures price also drops. Traders sell bond futures expecting rates to rise, which leads to lower futures prices in the market.
Why Do Bond Futures Rise When Interest Rates Fall?
When interest rates fall, older bonds with higher returns become more valuable. This increases their market prices. As bond futures reflect bond prices, futures prices also rise. Investors buy bond futures expecting bond prices to go up when they believe interest rates will drop. This creates demand and pushes futures prices higher.
How Do Traders Use Bond Futures for Interest Rate Prediction?
Traders look at bond futures to understand what the market expects about future interest rates. If bond futures prices are falling, it may mean traders expect interest rates to rise. If futures prices are rising, it suggests traders think rates will fall. This helps banks, investors, and fund managers plan their strategies ahead of time.
What Happens to Bond Futures When RBI Changes Interest Rates?
In India, when the Reserve Bank of India (RBI) increases interest rates, bond futures generally fall. When the RBI cuts rates, bond futures usually rise. This is because RBI rate decisions directly affect borrowing costs and bond yields. Investors follow RBI moves closely to trade bond futures smartly and avoid losses.
How Can Indian Investors Benefit from Bond Futures?
Indian investors can use bond futures to protect their portfolio from interest rate risks. For example, if you expect rates to rise, you can sell bond futures to avoid losses in bond prices. If you expect rates to fall, buying bond futures can give profits. It is useful for banks, mutual funds, and smart retail investors who follow market trends.
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