Forex Market versus Bond Market 

Almost everyone has invested in the bond market through money market funds.  The bond market which includes money market funds, Treasury securities, Municipal securities, federal agency securities, mortgage securities, asset-backed securities and corporate bonds  is generally considered to be a safe place to invest your money.

In fact, many people think you are guaranteed not to lose any of your principal in the bond market.  However, even though the bond market is certainly conservative, it is not a guaranteed market. While the possibility is very minimal, you could still lose some, or even all of your principal by investing in the money market.

So how do we compare the Bond Market with the Forex Market ?

1.     Commission Differences

Commissions Investors trade bonds through two markets: the over-the-counter (OTC) market and the secondary market.

The bond market, with the exception of U.S. Treasury bonds and notes—which trade on the Chicago Board of Trade (CBOT)—does not have a central exchange. Instead, bond dealers and brokers coordinate the sale and purchase of bonds through other bond dealers and brokers. To pay dealers and brokers for their services, bonds usually

trade at a marked-up price to make it worthwhile to the brokers.

So you can understand the benefits of operating in the commission-free environment of the Forex market as compared to the Bond market where commission can be quite high especially for less common deals

2.     Trading Hours

The CBOT trades U.S. Treasury bonds and notes on the trading floor each weekday from 7:20 a.m. until 2 p.m. CST and electronically each weekday from 6 p.m. to 4 p.m. CST the following day. Most of the trading is done on the CBOT trading floor during business hours.

The rest of the bond market, which does not operate on a central exchange, can potentially operate on a 24-hour basis, but it usually doesn’t because bond dealers and brokers need to be in their offices in order to transact trades.

3.     Liquidity

Liquidity Bonds are usually quite liquid during business hours. However, after business hours, liquidity can dry up quickly. This can be problematic if something happens later in the evening or during the night to affect the bond market. Prices will most likely have changed significantly before the beginning of the next business day, and you may be stuck with losses.

Gap 4: Taxes

4.     Taxes

While the Forex market stacks up well against some bonds with respect to tax issues, many bonds are far superior to the Forex market when you are analyzing tax consequences.

Many bonds are issued as tax-free bonds, which means that you do not have to pay taxes on any of your profits. The profits from U.S. savings bonds can also be tax free if you use them for education.

5.     Bear Markets

To bond owners, bear markets occur when bond yields go up. However to others, bear markets occur when bond yields go down.

As the prices of bonds change, the bond yields also change. The more expensive a bond is, the lower the bond yield will be.

When a bond’s yield is rising, it means that the price of the bond is dropping. If you own the bond, this is bad news for you because, if you had to sell your bond right now, you would get less money and could end up losing money on the transaction.

However, if you were investing in the Forex market at the same time, you would be able to offset your losses in the bond market with your gains in the Forex market. Similarly, when the bond yield is dropping, it means the price of the bond is rising.  This can happen the reverse way as well.

6.     Analysis Overload

The bond market offers many varieties of bonds to choose from. You can also choose from myriad bond funds offered by virtually every mutual fund family and investment bank. To make your decisions, you need to know which ones offer tax advantages, which ones are no-coupon bonds, when they expire, how frequently interest payments are disbursed, what the yield to maturity is, and so on. On top of that, you

have to figure out the ratings scales.  Learning all this will take some time and effort.

7.     Predictability

The Forex market as compared to the Bond market is not as predictable. Because you have to monitor the market and make individual decisions about your investments, your returns are going to fluctuate. You certainly have the ability to make a lot more money in the Forex market, but your returns will certainly not be as predictable.