GOLD Before trading, understand resistance and support levels properly. Support is the level where the price stops falling and starts going up, while resistance is the level where the price stops rising and starts going down. If the price breaks below support, it may fall further, and if it breaks above resistance, it may go higher. Understanding these levels will help you make better trading decisions and avoid losses. Trade wisely!
Given that ILTB only dates back to 2011, one may look to an approximation to analyze its sensitivity to recessions. I've charted (HQMCB10YR+US10Y)/2 as such. For the most part it's highly correlated to the 10 year Treasury, but shit the bed during the GFC. If you can't handle the turbulence stick with BND, which has lower corporate exposure, or just straight Treasuries with no corporate exposure 💪
SPYVIX and US10 continue to retreat off of this morning’s high, high volume is on the buy side, and people are still talking about holding puts. Clearly a bullish trend today.
SPY Seeing some relief on the VIX this morning. With Powell set to speak, it is important to remember that the rising US10Y is cause for concern for the government. Powell will likely try to avoid making any comments that will cause yields to spike.
Understanding the US 10-Year Yield and Its Impact on Equity Markets
For those analyzing equity cycles, a critical component to monitor is the US 10-year Treasury yield. This yield has an inverse correlation with bond demand—when bond purchases increase, yields tend to decline, and when bond selling accelerates, yields rise.
The Relationship Between Bond Demand and Yields
When institutional investors, central banks, or foreign governments purchase a significant amount of US Treasury bonds, demand for these bonds increases. Since the coupon payment (interest) on the bond remains fixed, an increase in bond prices results in a lower effective yield (or interest rate). This is because the yield is calculated as a percentage of the bond’s price—when price goes up, yield goes down.
Conversely, when bondholders begin selling off US Treasury bonds, their prices decrease, leading to a rise in yields as new bonds must offer higher interest rates to attract buyers.
Why Does This Matter for Equities? • A downtrend in the US 10-year yield suggests that liquidity is increasing in the market. • Lower yields reduce borrowing costs, making loans and mortgages more affordable. • More money flows into investments, particularly equities, supporting higher stock prices. • This often aligns with quantitative easing (QE) or other accommodative monetary policies that inject liquidity into the system. • A rising US 10-year yield, on the other hand, signals a liquidity drain. • Higher yields suggest that bonds are being sold, driving their prices down and interest rates up. • Increased borrowing costs lead to slower economic growth and reduced corporate profits, which can weigh on stock valuations. • This is typically associated with tightening monetary policy or a flight to safer assets, which can cause equities to decline.
Liquidity and the Stock Market
Liquidity is the lifeblood of financial markets. Equities, valuations, and liquidity all move in tandem—higher liquidity generally drives stock prices higher, while lower liquidity constrains capital flow and can lead to market downturns.
Key Takeaway
Always monitor the US 10-year yield, as it is a strong leading indicator of liquidity conditions in the US and global markets. A sustained decline in yields suggests an increase in liquidity, potentially bullish for equities. Conversely, a sharp rise in yields can indicate tightening financial conditions, often signaling equity weakness.
This perspective is not the sole driver of market cycles, but understanding this correlation can provide valuable insight into the broader macroeconomic landscape and its impact on asset prices.