Treasuryyield
Ivey PMI could boost Canadian dollarThe Canadian dollar has reversed directions on Tuesday and posted slight losses. Currently, USD/CAD is trading at 1.2549, up 0.25% on the day.
The Ivey PMI rebounded in impressive form in February, rising to 60.0, well into expansionary territory. This followed two straight readings below the 50-level, which indicated contraction. The street consensus stands at 62.0 for March, and a read within expectations could boost the Canadian dollar.
A booming house market in Canada and elsewhere has raised fears of a housing bubble. Soaring house prices are nothing new in major urban centers such as Toronto and Vancouver, but this red-hot market has spread across the country.
However, the Bank of Canada will be unwilling to make any moves such as raising interest rates, given the fragility of the Canadian economy. The recovery could be a long one, as Canada's vaccine rollout has been unimpressive, and Covid continues to weigh on the economy. BoC Governor Tiff Macklem has called the price increases in housing "unsustainable", but with mortgage rates at an ultra-low 1.5%, demand will likely remain strong, keeping house prices at very high levels in the near future. If mortgage rates suddenly rise, it could trigger a significant drop in house prices and drag the Canadian dollar down as well
The US dollar has lost some of its lustre, as US Treasury yields have retreated. The greenback failed to take advantage of a stellar Nonfarm Payrolls report on Friday, which rose to 916 thousand, up from 379 thousand. With the Biden administration working on a massive infrastructure package, there are expectations that upcoming NFP prints will exceed the 1-million mark, as the US economy continues to gather steam.
There is resistance at 1.2640. This is followed by resistance at 1.2703. n the downside, there is pressure on support at 1.2521. Below, there is a support level is at 1.2465
Australian retail sales in focusThe Australian dollar continues to have a relatively quiet week. Currently, the pair is trading at 0.7609, up 0.18% on the day.
Australia's retail sales were a major disappointment in February, as the interim report came in at -1.1%, much worse than the street consensus of +0.6%. The final February release (Thursday 12:30 GMT) is projected to show an identical reading, which would indicate a slump in consumer spending, a key driver of the economy. Earlier on Wednesday, Building Approvals, which tends to show sharp swings, shot up by 21.6% in February, rebounding from a reading of -19.6% a month earlier. This was the strongest one-month gain since 2012.
Just five weeks ago, the Australian dollar was looking down from the heights of the 80-level. However, it has been all US dollar since then, as the Aussie strains to stay above the 76 level. The greenback has shown significant strength in recent weeks, thanks to rising US Treasury yields. On Tuesday, the 10-year yield rose to 1.77%, marking a 14-month high.
With the US economy gathering steam, conditions appear right for further gains by the US dollar. The Biden stimulus package of 1.9 trillion dollars is expected to improve economic conditions, and an aggressive vaccine rollout should bring down Covid-19 numbers in the coming weeks and months.
The dollar could make further gains before the day is out, with President Biden revealing some details of the 3-4 trillion infrastructure package at a speech in Pittsburgh and the ADP Employment report projecting a stellar gain of 552 thousand (12:15 GMT).
AUD/USD faces resistance at 0.7744. Above, there is resistance at 0.7848. On the downside, 0.7560 is providing support. This line could face pressure if the AUD downturn continues. It is followed by support at 0.7460.
The US dollar index rose 0.38% to 93.30 overnight, and is at 93.23 today in Europe. The index is now well clear of its 200-day moving average (DMA) at 92.50, with the technical picture suggesting further gains to 94.30 ahead.
Under the hood of the DXYThis chart breaks the DXY down to it's individual components and examines each currency pair individually. In addition, the DXY itself is depicted as an area line at the bottom of the chart to give a more comprehensive feel for its movement.
There has been a confluence of the US treasuries selling off (pushing rates higher) while the opposite is occurring in other countries. Therefore, the widening of treasury spreads between the USD and its DXY counterparts is creating an increase in demand for the dollar.
Euro falls to 4-mth low despite strong PMIsThe euro continues to head south in Wednesday trading. Currently, EUR/USD is trading at 1.1828, down 0.17% on the day.
Just four weeks ago, EUR/USD was basking above the 122 level and looking strong against the US dollar. Fast forward to the present, and the euro is struggling to keep above the 1.18 level as its trades at its lowest level since November 23rd. It's been a dreadful March, with EUR/USD falling 2 percent this month. The main catalyst for the slide against the US dollar has been the significant rise in US Treasury yields, which have boosted the dollar. US 10-year yields rose to 1.73% on Friday, as shade below its 52-week high of 1.75%. If the upward trend resumes, we can expect the euro to lose more ground.
Investor sentiment towards the eurozone has been weak, to such an extent that excellent PMI data on Wednesday failed to give the euro a much-needed boost. On the manufacturing front, France, Germany and the eurozone all showed strong growth, highlighted by an outstanding German read of 66.6. Services also showed improvement, although France and the eurozone remain in contraction territory. German Services PMI improved to 50.8, the first time the index has shown growth in seven months.
The euro is also under pressure this week over a vaccine dispute with the EU. A shortage of AstraZeneca vaccines across Europe has resulted in a threat by the EU to block shipments of the vaccine to the UK. Such a move would likely send tense relations between the EU and the UK to a new low. The irony of the EU move to hoard vaccines has not been lost in British media, with The Telegraph newspaper publishing a survey which shows that a majority of people in Germany, France, Italy and Spain consider the AstraZeneca vaccine as unsafe.
EUR has broken below critical support at 1.1840, where the 200-DMA is also situated. If EUR closes below this level, we can expect further losses, with the next support line at 1.1808. If the downturn continues, it could potentially reach as low as the 1.16 level in the coming days. On the upside, 1.1971 has some breathing room in resistance as EUR loses ground.
Japanese yen flirting with 109The Japanese yen is almost unchanged in the Monday session. Currently, USD/JPY is trading at 108.74, down 0.09% on the day.
The Japanese yen remains vulnerable and the symbolic 109 level is under strong pressure. The dollar has had its way with the yen in 2021, as USD/JPY has jumped 5.5% this year. Last week, the pair climbed to 109.36, its highest level since June 2020. The yen is particularly sensitive to rate differentials between the US and Japan, so the increases in US yields are putting strong pressure on the Japanese currency. The 10-year Treasury yield enjoyed another strong week, rising to 1.72% on Friday. Although the 10-year bond has retreated to 1.67% on Monday, the trend remains positive for bonds, which likely spells more trouble for the shaky Japanese yen. This week has more than 100 billion dollars in government bond auctions, which will test the market's appetite for bonds following last week's Fed policy meeting.
In Japan, the equity markets are sharply lower after the BoJ widened its JGB trading band and tweaked its ETF guidance at its policy meeting on Friday. BoJ Governor Kuroda didn't surprise anyone when he said that monetary easing would continue for a long time. The bank has opted to make some tweaks rather than overhaul its monetary policy, and for this reason the bank's inflation target of 2 percent is likely to remain a bridge too far for the foreseeable future. Later, the bank releases BoJ Core CPI, its preferred inflation gauge (Tuesday, 5:00 GMT).
The market will be again paying close attention to the Federal Reserve this week. Later on Monday, Fed Chair Powell will participate in a panel and we'll also hear from FOMC members today and on Tuesday. Powell will testify on Tuesday and Wednesday before Congress, together with Treasury Secretary Yellen. The topic of Powell's testimony is the CARE Act for Covid relief, but investors will be looking for any comments related to higher bond yields or inflation. Any remarks in this regard from Powell or Yellen could shake up the US dollar.
USD/JPY is currently range-bound. On the downside, the pair is putting pressure on support at 108.55. Close by, there is support at 108.20. There is resistance at 109.30, followed by resistance at 109.70
Weekly $TLT Most Oversold.... EVER!We are watching a capitulation of long dated bonds in real time. Today's huge gap down of -2% breaking last week's lows is actually perfectly in line with TLT seasonality for the past 16 years. This is no coincidence as the March 2009 - March 2010 sequence in bonds is very similar to the March 2020 - March 2021 sequence. The Q1 FOMC in the 3rd week is usually a catalyst to reverse the sentiment in bonds. This extra gap down near the statistical low for the *Entire Year* is a true gift. When bonds recover, expect a huge buy cycle back into beaten down tech/growth stocks.
A big clue today was Gold. It tracked 30Y bonds (ZB Futures) overnight down, but reversed hard with the Euro off supports. Normally, if TLT was down -2% at the USA open gold would be crushed, but it did the exact opposite. Something is off with long dated bonds and I feel this will be quickly resolved with the FOMC catalyst next week.
Join in this great trade!
TLT Seasonality for the previous 16 years - There are no coincidences!
10-Year Notes Auction Result Is Pointing Toward Market StabilityTuesday's 3-year notes auction, Wednesday's 10-year notes auction, and Thursday's 30-year bond sale are 3 of the most closely watched auction that will be happening this week due to the recent focus on bond yields which have been a key driver of stock movements.
We saw that on Tuesday, the $58 billion auction in 3-year notes was well-received, attracting demand that is well above average. This can be seen from the bid-to-cover ratio, which acts as an indicator of demand, where we saw a ratio of 2.69 for Tuesday's auction, which is stronger than both the 2.39 ratio we saw in February as well as the average ratio of 2.40. This temporarily eased the fear of an uncontrollable rise of velocity in the surge of bond yields.
I believe today's $38 billion auction in 10-year notes has helped to further calm such uncertainty.
Following today's auction, the Treasury sold $38 billion in 10-year notes at a yield of 1.523%, with bidders seeking $2.38 for every $1 on offer from the government. This means that the bid-to-cover ratio stand at 2.38, which is nearly on par with last month's 10-year notes auction ratio of 2.37, but lower than the average taken from the last 10 previous 10-year notes auction ratio of 2.42.
While this does not indicate above average demand like what happened yesterday with the 3-year notes auction, it does shows that today's auction has demand that is consistent with recent auctions. This is a good thing because one of the things that market participants are fearful for is unpredictability and instability caused by more weak auctions that are not within expectations like what we saw in late February's auction of 7-year notes where an unexpectedly weak auction caused the market to sell-off.
As such, given today's average 3-year notes auction that was within expectations in combination with the lower than expected core CPI data that was released earlier today, the fear surrounding the bond market is temporarily put to a halt once again.
Tomorrow's $24 billion sale of 30-year bond will be the last straw of the week that could potentially move the market significantly in either direction. Market participants in the stock market should continue paying close attention to the situation surrounding the bond market because I believe that Treasury yields and the result of bond auctions will continue acting as an indicator of the general direction of the broader stock market throughout this week.
Invest safe.
This is not investment advice so please do your own due diligence!
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Inflation Concerns Eases Amid Lower Than Expected Core CPI DataAmid rising concerns on inflation, today's release of Consumer Price Index (CPI) data for February is among the most anticipated event of the month. The CPI acts as a gauge for inflation, where it measures the average change in prices over time that consumers pay for a basket of goods and services.
The CPI data vs Analysts' estimates is as follows,
CPI: 0.4% vs Expected 0.4%
CPI YoY: 1.7% vs Expected 1.7%
Core CPI: 0.1% vs Expected 0.2%
Core CPI YoY: 1.3% vs Expected 1.4%
Note that Core CPI excludes the volatile food and energy prices, while CPI is an all items index.
Considering the above CPI data that is relatively tamed, we can expect the market's concern about a spike in inflation to be eased for the time being. We also saw the 10-year Treasury yields sliding lower, and an upward push in the stocks pre-market in reaction to a positive miss in the Core CPI data.
As such, I expect the broader stock market to stay relatively green today, at least until the $58 billion auction in 10-year notes that will happen later today, which may provide further indication on where Treasury yields may be headed going forward. Thus, market participants in the stock market should continue paying close attention to the situation surrounding the bond market as it will help provide you with insights on what you can expect for the day's movement.
Invest safe.
This is not investment advice so please do your own due diligence!
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Today's 3-Year Notes Auction Is Why The Stock Market ReboundedAfter experiencing a sharp spike in the 10-year Treasury yield last month due to an unexpectedly weak demand of a US$62 billion 7-year notes auction, today marked the start of a crucial bond auction week that will test the condition of the bond market.
This week's schedule is as follows,
Tuesday: $58 billion auction in 3-year notes
Wednesday: $38 billion auction in 10-year notes
Thursday: $24 billion sale of 30-year bond
Following today's auction, the Treasury sold $58 billion in 3-year notes at an auction-high yield of 0.335%, with bidders seeking $2.69 for every $1 on offer from the government. According to the bid-to-cover ratio, which acts as an indicator of demand, the ratio stands at 2.69, which is stronger than both the 2.39 ratio we saw in February as well as the average ratio of 2.40, indicating that the bond auction was well-received compared to what was expected. As a result, lingering fear of an uncontrollable rise in velocity of the surge in Treasury yields was temporarily put to a halt today. This caused the 10-year Treasury yield to drop by 4.46% today, and resulted in a rebound in the U.S. stock market, with S&P 500 up by 1.42%, NASDAQ up by 3.69%, and DJIA up by 0.10%.
I expect Treasury yields and the result of the aforementioned bond auctions to continue acting as an indicator of the general direction of the broader stock market throughout this week. Market participants in the stock market should continue paying close attention to the situation surrounding the bond market as it will help provide you with insights on what you can expect for the day's movement.
Invest safe.
This is not investment advice so please do your own due diligence!
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Yen falls to 10-month lowThe Japanese yen has started the week with considerable losses. Currently, USD/JPY is trading at 108.82, up 0.51% on the day.
The yen's woes continue, as the US dollar continues to beat up on the Japanese currency. USD/JPY has jumped 5.6% since January 1 and is pressing on the 109 line, which has held since June 2020. The catalyst behind the recent strength of the US dollar has been the recent rise in US Treasury yields. The 10-year bond climbed to 1.60% earlier on Monday, while 30-year bonds rose to 2.31%. The yen is particularly sensitive to rate differentials between the US and Japan, so the increases in US yields are putting strong pressure on the Japanese currency.
The higher US yields were in response to the Senate passing a massive 1.9 trillion dollar stimulus package on Saturday. The bill now returns to the House for some amendments, and will likely to be signed into law by President Biden by March 14.
Although the dollar's strength is largely due to the increase in US yields, fundamental releases should not be overlooked. A surprisingly strong US Nonfarm Payrolls last week has provided the US dollar with further upward momentum. The gain of 379 thousand easily beat the forecast of 197 thousand, and was the highest reading since October 2020.
Later on Monday, Japan releases a data dump. Consumer spending and wage growth are both expected to show contraction (23:30 GMT). Japan's second-estimate GDP is expected to show growth of 3.0%, confirming the initial estimate (23:50 GMT).
USD/JPY broke above resistance at 108.16 on Friday. The next resistance line is at 109.64, followed by resistance at 110.07. There is support at 106.96, followed by a support line at 105.53. There may be an opportunity for buy-on dips as low as 107.50
US 30-year Treasury Bonds; Get ready to buy them up.These will easily outperform US (and probably global) equities by a very wide margin! (3%-5% annually) - And so will the 10-year Notes, and the T-Bills, and ... Bet on it! (Inflation expectations = waiting for the Tooth Fairy)
... and when the head o JP Morgan Chase says; "I wouldn't touch 30- year treasuries!" ... You know it's time to load up!
The Link Between Inflation, Rising Bond Yield, & Market Sell-offAggravated by Jerome Powell's speech at the Wall Street Journal Jobs Summit, the tech-led sell-off continues, causing the Dow Jones Industrial Average to fall by 1.11%, S&P 500 by 1.34%, and Nasdaq Composite by 2.11%. On that note, the 10-year Treasury yield also popped to 1.541% during Jerome Powell's speech, later closing at that level for the day.
But how, specifically, did Jerome Powell cause the market to sell-off yesterday? Let's find out.
Prior to Jerome Powell's speech, there were already a substantial amount of tension surrounding the bond market and concerns regarding inflation.
A key event occurring recently that brought a great deal of attention to the acceleration of rising bond yields were the sudden spike in 10-year Treasury yield back in 2/25/21 from 1.38% to 1.54% - temporarily jumping as high as 1.6%, when an auction of US$62 billion 7-year notes was met with weak demand. This rattled the stock market because investors were not ready for the velocity of the 10-year Treasury yield surge. Instead, they were expecting for yields to gradually inch higher throughout the year.
In an effort to pinpoint the exact reason for the surge, many conclusions were drawn. One of which relates to inflation concerns. Over the course of the pandemic, trillions in fiscal relief has been delivered, of which an addition $1.9 trillion in fiscal package is expected to come from the Biden Administration. With so much money printed and nowhere to flow yet due to economic lockdown as a result of the pandemic, investors fear that once the economy reopens again, pent-up demand will drive people to go on vacation and spend in masses, injecting all the printed money over the course of the pandemic into the economy all at once, driving inflation up at a rate that has not been seen since the 2008 Financial Crisis. Due to this belief of a looming inflation, it makes bond that are purchased currently potentially worthless because of possible subpar yield. As a result, people flock away from bonds at the moment because they are expecting that yields will rise going forward in order to compensate for inflation risk. Thus, yields are continuously being driven up.
However, with the sudden spike in yield, it creates uncertainty around whether we will be seeing an acceleration of rising bond yields and possibly indicate that inflation could be around the corner. The possibility of this scenario is further amplified by vaccination efforts contributing to a recovering U.S. economy, and the incoming $1.9 trillion fiscal package that could further inflate the economy going forward while pushing the economy further into the recovery.
Taking all of this into account, let's go back to Jerome Powell's speech.
Having understood all of these, investors were looking at Jerome Powell to see whether he would give any indication on how he plan to control the acceleration of the rising bond yield, perhaps through an adjustment of the Fed's asset purchase program, where they will step up on the purchasing of long-term bonds to drive down long-term interest rates, or even extending the Supplementary Leverage Ratio that will be expiring on 3/31/21, so that banks can further help with the purchase of long-term bonds.
However, in his speech, Jerome Powell said nothing of the sort, in which the market took as a signal that yields could rise further, triggering the sell-off even further, and driving the 10-year Treasury yield further up to a level that matches the initial 10-year Treasury yield spike back in 2/25/21. In fact, Jerome Powell made supposedly positive remarks stating that he expects the rise in inflation as the economy recovers to only be temporary, that he does not expect the move up in price to be long-lasting nor does he expect it to be enough to change the Fed's accommodative monetary policy, among others. With the market sell-off and surge in yield during his speech, it is clear that the market neither believes his words nor views it positively.
To conclude, we are now in a very volatile situation where stocks no longer just goes up. We cannot control the direction of the market, but what we can control is how we deal with this situation emotionally and monetarily. Don't get too hung up on the short-term bearishness of the current market condition because if you zoom out your chart, in the grand scheme of things, this is just a tiny bleep. As such, if you believe that we will eventually recover from this market sell-off, use this as an opportunity to buy into your favorite companies at a huge discount.
Invest safe.
This is not investment advice so please do your own due diligence!
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ZenMode Snapshot: Bitcoin Fundamental/Technical AnalysisStill think the fundamentals for bitcoin are incredibly bullish:
Miners:
Outflows - Bearish
Miners still depositing to exchanges - Bearish
BTC Whales:
Reserves Increasing - Bullish
Transferring BTC off exchanges - Bullish
Institutions:
Still a narrative of corporations acquiring BTC in leu of traditional treasury assets - like treasuries
Bombarded with treasury yields now indicating inflation is coming
$1.9 T Stimulus
I have gotten questions about why the sell off in commodities, crypto, treasuries and equities last week - and aside from technical reasons, the article sourced below from Bloomberg is a must read:
"Already low short-term interest rates are set to sink further, potentially below zero, after the Treasury announced plans earlier this month to reduce the stockpile of cash it amassed at the Fed over the last year to fight the pandemic and the deep recession it caused. The move, which aims to return its cash position at the central bank to more normal levels, will flood the financial system with liquidity and complicate Powell’s effort to keep a tight grip over money market rates.”
" ... a drop in short-term market rates into negative territory could prove disruptive, especially for money market funds that invest in short-dated Treasury securities. Banks may also find themselves hamstrung by effectively being forced to hold large unwanted cash balances at the central bank. The Treasury’s decision -- unveiled at its quarterly refunding announcement -- will help unleash what Credit Suisse Group AG analyst Zoltan Pozsar calls a “tsunami” of reserves into the financial system and on to the Fed’s balance sheet. Combined with the Fed’s asset purchases, that could swell reserves to about $5 trillion by the end of June, from an already lofty $3.3 trillion now."
"Here’s how it works: Treasury sends out checks drawn on its general account at the Fed, which operates like the government’s checking account. When recipients deposit the funds with their bank, the bank presents the check to the Fed, which debits the Treasury’s account and credits the bank’s Fed account, otherwise known as their reserve balance."
So think about this from the perspective of a financial institution, they would have to make the Treasury market holding a product with potentially negative yield - while also forced to buy insurance on the larger reserves they will need to manage. If you are a financial institution are you going to want to offer financing in the overnight market that has negative yield so a company you work with can hold Treasuries? And with the flood of Treasuries & Liquidity this also has muscled up the 5Y yield while the repo market might potentially be going negative. With the 5Y yield up now in Treasuries I am reading how the 10Y yield is comparable now to the SPY Dividend of 1.45% - and keep in mind the reduced risks in holding Treasuries. They are practically as good as gold for a corpo.
10Y Yield
10Y Bond
5Y Yield
5Y Bond
So while the Federal Reserve controls the Federal Funds Rate, the Treasury Department can absolutely impact the yield in treasuries, and impact the overnight rate.
This hurt risk assets, as the market now needs to price in Treasuries actually offering yields potentially worth getting into. A fascinating exchange exchange with MicroStrategy CEO Saylor talking to Bloomberg discusses thought that even now this yield is a pittance when compared to the cost of capital for companies. It is telling that a company with modest cash flow is saying that rather that investing into their operations further, and rather than giving back to shareholders, or doing share buy backs they are purchasing bitcoin as the yield on bitcoin is stunning relative to Treasuries or holding a basket of FANG stocks.
Really interesting interview worth watching:
www.youtube.com
The key is if other executives will follow the lead of TSLA, SQ, MSTR and add Bitcoin on the balance sheet. While it may seem unconventional, keep in mind if you are a multinational corporation it is perfectly normal to have hundreds of bank accounts, like Disney, Microsoft or Facebook for example because you have vendors all over the world you will need to compensate for their services, in their currencies.
Technical Snapshots:
If price continues to sell off nice confluence of support with pivot points/fibonacci fan & bollingers at $40k - $40k breaks, we could hit $38k rather rapidly before I imagine buyers will be attracted
Bulls will have a tough time breaking $48.5k followed by $50k . Even then, we might form a lower higher, and test support yet another time before continuing to new ATH
I remain long, and am nibbling on dips, and enjoying these rips. I plan on adding to the position if we break $40k. My exit strategy will be to bail If we fall under $28k, as at that point I would have 3X'd the initial cost basis of this position.
In closing, do not forget, why is the Repo market going negative, and why are 5Y yields rising? Inflation concerns. The formula for inflation is M2*V= inflation. Velocity will increase as the nation opens back up causing inflation, especially as the M2 supply is about to take on another jolt. I suspect this stimulus will pass, and I think Bitcoin is a potential lifeboat when inflation hits. Yes, we need to price in treasuries now - and yes I thought it was bonkers that the market suddenly tanks treasuries to pop yield for inflation and then - the market rotates into the dollar? So inflation is coming and the dollar rises as it did on Friday? I think I would recommend parking some wealth in the bitcoin lifeboat. Perhaps a moonshot, but this macro-narrative warrants it in my opinion.
Final Quote coming from Michael Burry last week:
"The US government is inviting inflation with its MMT-tinged policies. Brisk Debt/GDP, M2 increases while retail sales, PMI stage V recovery. Trillions more stimulus & re-opening to boost demand as employee and supply chain costs skyrocket." #ParadigmShift
— Cassandra (@michaeljburry) February 20, 2021
Good luck traders! If you enjoy please be sure to hit the like button, and tell me what you think! Hope you all make a million! :)
Keep in mind when the gold-bitcoin bears come out saying that it is too volatile, it is worth advising that even with this sell off you can still acquire an ounce of gold for only 0.038 BTC:
Or 745 barrels of oil:
Source:
www.bloomberg.com
$TQQQ Market Correction DDThe market was extremely bloody last night, where we saw $TQQQ trading at highs of $98.07 at one point and subsequently closing at $87.90. I believe this can be attributed to the rising bond yields trend we are currently witnessing, particularly in the 5 year and 10 year treasury yield.
Between the start of February 2021 to February 24th, the 5 year treasury yield has been steadily increasing at an average of 0.01 to 0.03 daily, while the 10 year treasury yield has been increasing at an average of 0.01 to 0.04 daily.
However, yesterday on the 25th of February, this skyrocketed. The 5 year treasury yield shot up by 0.19 from 0.62 to 0.82, while the 10 year treasury yield shot up by 0.16 from 1.38 to 1.54. Typically, when the 5 year treasury yield goes beyond the 0.75% threshold and the 10 year treasury yield goes above the 1.50% threshold, the stock market tend to sell off in reaction to that. This huge one-day surge in yield return as a result of a lack of interest in bonds likely exacerbated the sell-off.
I believe that this correction is extremely healthy in a market where a lot of the valuations are rather high; and this is unlikely the "huge market crash" or the "bubble pop" premonition that many investors are fearful for, especially considering the fact that a huge $1.9 trillion stimulus will be incoming.
However, it will undoubtedly do us good to remain cautious and keep some cash on the side because in the short-term, the hardening of yields will likely lead to some volatility - which means more frequent dips for you to average your positions; but more importantly, eventually, the consequences of printing these money will likely catch up to us in the form of record-level inflation and interest rate rise, possibly killing the bull run - and we need to be prepared for it.
For now, I expect growth from the support zone of this bullish channel back to the $100 to $110 range.
This is not investment advice so please do your own due diligence!
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10 Yield Spike Bigger Risk To Markets Than Election?This is the monthly chart of the yield on the 10Y note. VIX Fix shows we put in excess below support (6.00) indicating most bulls have capitulated. Breaking above June yield highs on a strong move out of bonds (perhaps into value stocks?) could bring on a yield of 2.5-3% on the 10 year, a 150-200% move higher. This kind of a spike in yields would eventually bring on a bearish market spiral out of the growth funds/tech stocks, heavily indebted energy stocks, as well as real estate funds. Increasing yields on debt would run the risk of extreme volatility in the corporate bond market, leading to more bankruptcies. Are there enough holders of bonds to squeeze yields higher despite investors' uncertainty? The federal reserve has been buying corporate bond ETF's and can't lower fed fund rates any further without going Negative. This fed buying was front-run heavily by hedge funds who anticipated years of rock-bottom rates as long as the fed provides a floor to bond prices. What could trigger such a yield spike? Most likely a clear winner being called in the US presidential elections, especially if the senate and WH is controlled by the same party. Bonds would sell off (leading to higher yields) as bond holders and those trading the yield curve suddenly realize that the overall market uncertainties which had scared them away from stocks suddenly vanish. While the short-term effect of a rise in yields will be bullish for stocks, expect to see a rotation out of those red hot growth names we've seen run for years along with all other debt-heavy investments like real estate. Their high valuations would be unsustainable with higher yields and a trapped federal reserve.
I'm personally long these growth stocks currently, but plan to sell spikes and potentially hedge in the meantime with a short /ZN 10 year note futures position (long yield).
What Yield? 2-Year Treasury Lows May Signal It's Bitcoin Time Several stakeholders in the crypto market see a lack of yields coming from traditional markets as a sign cryptocurrency has a place in uncertain times.
“We are moving into a period of stagflation – stagnant growth and inflation – which creates a steepening of yield curves in the fixed income world,” said Chris Thomas, head of digital assets for Swissquote Bank.
Indeed, U.S. Treasury yields have dropped in 2020 – the two-year maturity is at its lowest yield in over 10 years.
“I have a customer leaving bonds for bitcoin. I look at that as very bullish,” said Henrik Kugelberg, a Sweden-based over-the-counter crypto trader. “Bonds that are supposed to be the safest bet there is to actually make a buck on your invested money now all of a sudden seems less attractive than bitcoin.”
NASDAQ- TINA?Sure, low yield rate alone doesn’t justify the extremely high valuation of NASDAQ, but many investors may have overlooked other factors that may have contributed to NDX's rise.
Quick recap of recent macro events-
THE BAD
Corporate profits in the United States dropped 11.8 percent to USD 1,569.2 billion in the second half of 2020, following a downwardly revised 11 percent fall in the previous period, a preliminary estimate showed. It was the sharpest decline in corporate profits since the last quarter of 2008, amid the coronavirus crisis.
According to association of corporate growth, 81% of middle-sized business failed to get a loan through the Fed’s Main Street lending program. Of course, survey might contain the selection bias.
According to S&P Global Market Intelligence, U.S. bankruptcies are on pace to hit their worst levels in 10 years , with experts expecting even more companies to suffer as the coronavirus pandemic stifles economic activity.
A total of 424 companies have gone bankrupt this year as of Aug. 9. Over 100 consumer-focused companies have gone bankrupt this year already. Industrials and energy combined account for nearly 100 bankruptcies. Overall, 35 companies that filed for bankruptcies year-to-date reported more than $1 billion in liabilities.
THE GOOD
Out of the 35 companies that filed for bankruptcies year-to-date and reported more than $1 billion in liabilities, none came from IT.
Overall, only 17 out of 424 companies that have gone bankrupt this year came from information technology.
Most came from large retail, energy, and transportation. Of course, when a big portion of sectors becomes highly unprofitable, investor's money would appropriately reward ones that remain profitable.
According to the Mortgage Bankers Association, The forbearance rate for mortgages backed by Fannie Mae and Freddie Mac dropped to 4.94% in the first week
of August, the first time it’s been below 5% since April.
Almost all housing indicators are up except mortgage origination rate.
THE INEVITABLE
In my opinion, the potential acceleration of industry consolidation is a bigger concern than dislocation. J&J and Apple, for example, are able to get 40yr loan at 3-4 percent interest rate. Low interest rate encourages big firms to refinance and borrow so they can more easily build up large cash cushion for M&A pursuit which ultimately might hurt consumers.
According to American association of individual investors’s July asset allocation survey, individual investors’ exposure to fixed-income assets declined to its lowest level in 15 months. Again, no one likes low yield rate and I would guess most money go into the equity market especially profitable sectors such as tech.
Some investors are still hoping for the dip back to the March lvl.
According to research note from Bank of America securities, since 1928, the 30% market drawdown happens once every decade and the average time for the market to bounce back after a drawdown of 20% or more is 4.4 years.
The two most similar situations in terms of magnitude of drawdown happened in 1987 & 1968 and it took them 101 days and 543 days respectively before the bottom was reached. Many of us thought this time would be the same especially since rarely has the bottom been reached at the onset of recession.
Well, guess what? Many of us have been fooled into believing that this time would be no different without realizing the underlying condition has changed... There was no QE back then.
Past doesn’t always predict the future especially if the underlying condition no longer applies.
Despite of the string of bad macro signals I listed above, market remains unfazed and marches on.
No party can last forever though. I believe that such a meteoric rise in tech stocks will come at the expense of long-term return as high valuation today leads to weak return tomorrow. Inevitably, valuation mean will one day revert lower to stay in line with historical trends.
However, none of us knows exactly when it will happen.
Therefore, waiting on the sideline, incurring the opportunity cost and missing out on all the gain is not the way to go either.
Time like this is why risk management and asset allocation matter.
US 10 Year yield looks to be heading lower soonThe 10 year treasury yield looks ready to resolve its multi-month consolidation triangle to the downside. There's room for another run up to the .70% area over the next couple weeks, but I ultimately believe we are heading for lower yields. Note the fairly swift rejection from the rally above the 50MA at the end of May / start of June.
I'm not making any plays directly on treasuries, but watching closely because a definitive break lower in yields would signal that stock markets may be heading for a major risk-off move.
10 yrConclusion is:
Bond market seems to think this pump in the stock market is suspect. 10yr should rally up to .80 zone if investors were actually risk on.
I am just keeping an eye on DXY, 10yr, WTI at this point as they r all showing mixed conflicting signals.
DXY looks to have slightly more downside B4 reversing up (only question is how strong)
10 yr looks to be showing me that bond investors don't feel that this pump in stocks are worth the follow thru.
WTI RSI looks destroyed and could get a bounce but the shale stocks OAS WLL not showing any signs of buying pressure & also have lost bottom TL or are loosing the bottom TL. When the bounce comes to WTI if there is no volume or follow thru on the bounce I would expect that to be a scam.
I think that the markets have entered bear market territory late June into July & we are at early stages of the new trend. Unless WTIC can get the mentioned volume buyers I think we are better off watching for now.
