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There are many global macro investing strategies that make use of the yield curve. While primarily used to trade bonds, there are also several good uses for trading stocks and currencies as well. In fact as powerful as the yield curve is, there is likely a few yield curve strategies for every asset class out there.

While there are may types of yield curves the most commonly used and most applicable is that of the Treasury yield curve. All you need to do to make a yield curve is to obtain the yield on different Treasury maturities. Get the ninety day, two year, five year, ten year, and the thirty year yields and you will be able to plot them out and see the shape and levels of the yield curve.

Of course being able to tell what will happen in the economy does not always translate to being able to profit from it as the markets sometimes do their own thing, or at least that is how it can seem. So how does one apply the yield curve to their trading? The primary rule of thumb is that an upwards sloping yield curve is bullish for the economy while a downwards sloping yield curve is bearish. The steeper either curve is the better or worse it is. At least these are the general rules.

You may be asking yourself why this is. The reasons are actually fairly simple and straightforward. If the curve is steep, meaning the short term rates are low and the long term rates are high it means that banks are lending as they are able to borrow short term from the Fed and charge long term rates to their customers. Obviously when business is good for the banks, they will be lending as much as they can. This in turn spurs new business spending as money is available.

If money is expensive then the economy will have a hard time expanding. If money is expensive for banks then they will not lend very much as they are not making money off of it. If money is cheap then the economy can grow easier as banks will lend and businesses will borrow more to expand and to spend.

Bonds and rates are like a piece of wood straddled on a log. If you sit at one end the other end goes up. If bonds are at one end yields are at the other. When yields go down bonds go up and vice versa. This is almost always the case, especially in an inflation environment.

So anytime that you see either of these events happen the global macro investor can start to look for an entry point to either buy or to sell bonds and stocks. If the curve is inverted then you will likely want to start buying bonds and selling stocks as the act of lowering rates will cause bonds to go up. After bonds have gone up and it looks like the Fed is done lowering rates it is worthwhile to look at stocks as the next beneficiary of the rate cuts as businesses can now borrow cheaper and therefore expand faster.

Of course as with all things in the market nothing works every time. In fact the quote history never repeats itself, but it often rhymes is a very appropriate statement. Used along with proper risk controls the yield curve can become one of the global macro investors best timing tools and economic gauges.