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Pyramid of Risk
Economic Indicators
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Glossaire 

Key Economic Indicators
Cause and Effect:

The causes and effects shown in this text are generally consistent with market experience. They do not guaranteed  that market will always behave in the same fashion... The magnitude of the impact caused by any one factor is never constant. It fluctuates over time.. 

Federal Reserve Board Policy
Cause and Effect: 

Fed Activities	Market Price	Reason
Fed Raises Discount Rate		An increase in the borrowing rate for banks from the Fed usually results in increased rates for the bank's customers. This action is used to slow credit expansion.
Fed Lowers Discount Rate		Usually results in decreased rates to bank borrowers.
Money Supply Increases		Growth in the money supply in excess of population growth is generally interpreted as inflationary. Fed may tighten monetary growth through raising the discount rate.
Fed Does Repurchase Agreement		Fed puts money into the banking system by purchasing collateral and agreeing to resell later, essentially a lending transaction. With more money available for lending, the expectation is for downward pressure on customer rates.
Fed Does Reverses or Matched Sales		This is the opposite transaction to the above. The Fed is essentially borrowing available liquidity, putting upward pressure on customer rates.
Fed Buys Bills		Fed lends money to the banking system, essentially increasing the supply of loanable funds, which should put downward pressure on rates.
Fed Sells Bills		Essentially decreases supply of loanable funds in the economy, creating competition for funds and upward pressure on rates.

 CBOT Treasury Futures Complex 

The Need for Treasury Futures 

The CBOT U.S. Treasury Bond futures contract is the most actively traded contract in the world. The T-bond contract is the cornerstone to the CBOT Treasury Complex, which includes 10-Year T-Note futures, 5-Year T-Note futures, 2-Year T-Note futures, and options on these contracts. This complex is vital to institutions and individuals across the globe, because it offers such widespread interest rate applications. There are six key reasons for the success of CBOT Treasury contracts: 

First, the increase in interest rate volatility worldwide creates a need for an effective, cost-efficient way to manage interest rate risk. International concerns about the relative strength or weakness of the U.S. dollar as compared to other major currencies, changes in U.S. Federal Reserve Board policies, debt and credit crises, and shifts in economic strength throughout the world have combined with other factors to make interest rate changes sharper and more dramatic. Volatility is now the rule rather than the exception. 

Second, long-term financial assets such as U.S. Treasury bonds and notes are acutely sensitive to interest rate changes. Therefore, T-bonds and T-notes, as well as futures contracts on those issues, will respond more dramatically to interest rate changes than other instruments with shorter maturities. 

Third, U.S. government securities have been issued and sold in record amounts, whetting the appetite of foreign investors and making U.S. Treasury bonds a "global" commodity. U.S. Treasury rates often serve as benchmarks for interest rates on bonds issued by other governments. 

Fourth, U.S. Treasury issues are marketable in an active secondary market that knows no geographical or time boundaries. Since Treasury debt need not be held until maturity, these issues may be bought or sold by interested investors any time, any place. 

Fifth, because of the tremendous trading volume of CBOT Treasury futures, buying or selling is relatively easy and not disruptive to the market, a factor known as liquidity. This is an important consideration for any investor, especially institutional investors. 

Key market indicators in an inflationary environment, for example, may be of little importance in a healthier economy. The impact on price direction may also shift as economic conditions change, so that information that now signals rising prices may one day cause them to drop. In addition the market often receives conflicting information, in which case the direction of price response will reflect the dominant factor in the current environment. 

Traders often anticipate key economic releases, estimate what the data will show, project its impact on price, and position themselves accordingly. If there is widespread agreement on these factors, the market will "price in" the data before its release. Should expectations then prove correct, there will be little or no subsequent effect on price, and a casual observer might falsely conclude that the release had no price impact at all. If, on the other hand, the data contradicts market assumptions, prices may move sharply. The direction and magnitude of these price corrections will now depend entirely on what assumptions had been priced into the market and on how different these were from the facts released. As a result, the direction of price movements often appears to be inconsistent with, or even contrary to, the broad guidelines given below. 

The price direction of fixed-income instruments and their corresponding futures contracts is impacted by information entering the marketplace. This includes Fed actions and economic announcements, as well as certain key news events. The importance associated with any of these events depends on current economic conditions, so their impact on prices changes with time. Even then, conflicting information may make it difficult to predict the Fed's response. Fed policy objectives are achieved through the activities described below. If economic data indicates an accelerating economy, the Fed will act to slow it by taking steps to raise rates. The reverse takes place when the economy shows signs of decelerating. The Fed will act to stimulate growth by lowering rates. While the impact of the events listed below may change with market conditions, it may be useful in understanding the factors that influence market direction.

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