Last week, a surge in US Treasury yields sent investors selling risky assets, sparking both the stock market and the cryptocurrency market to drop quite substantially.
With better news of the COVID-19 situation around the world, expectations of improving economic activities have caused the prices of global government bonds and their respective yields to drop to a low. edge up since Feb. 10, as evidence of vaccine effectiveness in the US and Europe. Things heated up last Wednesday after the testimony of Federal Reserve Chairman Jerome Powell was deemed more belligerent than expected. Then came the US Treasury auction on Thursday which saw no buyers, which raised fears and sparked a rout of liquidation.tion of US Treasury Bills. Yields on U.S. Treasuries, which move in the opposite direction of bond prices, soared on Thursday, sending shivers down the spine of investors who have started selling their stocks and cryptocurrencies which have accumulated in a huge market sale. Gold, silver and oil have not escaped the carnage and also retains
Powell's comments that the rise in yields was the result of the strength of the economy. The economy has led traders to believe that the days of super-loose monetary policies are over and that a rate hike may come sooner than expected.
Rising bond yields and rising interest rates are detrimental to companies and risky assets, because in an environment of rising interest rates, redemptiona loan doesn't get more expensive. Rising yields on US Treasuries in particular make it more expensive to repay debt owed by the US government, in turn worsening the already dire situation for the US government.
Rising yields are bad for markets in 2
- it makes companies less apt to take out loans or adds pressure on companies in that their interest payments may increase. Therefore, the growth of companies may be hampered, which will affect their profits. Businesses can report worse income, there is less money to spend because businesses are not doing well. If companies are listed, bad earnings will affect their stock price.
- Rising yields require borrowing for investment or trading much more expensive and reduced borrowing to play on the markets. As we all know, the extremely low interest rates of the last decade have made it very easy for anyone to borrow funds to trade in the market which has made the market the highly leveraged market that it is today. If interest rates skyrocket, leveraged traders have to pay more to repay their loans and may be forced to sell their positions if they are unable to pay the higher interest, which leads to more losses, which leads to even more losses. margin calls are liquidated. Therefore, this situation causes the markets to fall very quickly and sharply. All risky assets, like gold, silver, and cryptocurrencies, have all been subject to high leverage and can see many sell-offs if interest rates continue to climb.
The market closed quite significantly last week because of these fears.
Investors tend to sell bonds when they expect faster economic growth and higher inflation, which drives down the value of fixed payments. bonds and may eventually lead the Fed to raise short-term interest rates. Even though at the FOMC meeting that just passed, the FED reiterated its position on accommodative monetary policies, investors did not seem to believe it as they felt the FED was still behind the curve. Powell's more hawkish-than-expected statement during his testimony last week did not please traders.
To make matters worse, after Powell's statement, US Department of Labor data showed on Thursday that the number of jobless claims fell sharply last week.denial, signaling an improvement in the labor market. With COVID-19 cases also showing sharp decline, positive expectations for better economic activity, coupled with expectations for higher inflation, triggered higher yields, benchmark Treasury bill at 10 years reaching up to 1.61%, its highest level in a year.
The rise in yields is not good for risky assets as mentioned, causing both the stock market and the cryptocurrency market collapsed. Gold and silver also fell, with the only beneficiary being the USD, which has been under heavy pressure for most of 2020. If yields continue to rise and the USD recedes. strengthens further, this bodes very badly for the stock market which has been supported by a decade of ultra-flexible monetary policies and aunprecedented leverage. The unwinding of positions and subsequent margin calls on leverage positions will cause the markets to spiral downward. Therefore, monitoring the evolution of bond yield is an important activity that every trader needs to determine the direction of the markets.
On Friday, however, yields retreated somewhat and appear to have stabilized ilized. The yield on the benchmark 10-year Treasury bill stood at 1.459%, down from 1.513% at Thursday's close. We have to watch the development of yields in the near future and find out if the Fed is coming to buy bonds to support the market if rates continue to rise. If the Fed does not do this and rates continue to rise, a stock market crash may be imminent.
About Kim Chua, PrimeXBT Market Analyst:
KimChua is an institutional trading specialist with a track record of success