Central bank communication about the likely future path of policy, used to move long rates today without changing the overnight rate.
Because a long yield is roughly the average expected short rate plus a term-premium, a credible promise about the next three years of short rates moves ten-year yields immediately. That is the whole point: guidance is a policy tool that works through expectations.
It comes in three flavours. Calendar-based guidance names a date. State-contingent guidance names a condition, such as holding rates until inflation has run above target for some time. Qualitative guidance uses phrases like "for an extended period". State-contingent guidance is generally the most durable because it does not expire awkwardly.
Example: the committee says it will not raise rates until inflation is on track to average 2%. The 2-year yield falls 15 basis points on the statement even though the target-range is unchanged, because the market has repriced the first hike six months later.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.
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