Ecoinometrics - March 08, 2021
All about the yield...
Really, it isn’t complicated. There is one main driving force in the macro trends at play in the last few weeks. It’s all about the yield.
When the yields for the US Treasury bonds are climbing, a lot of what used to look attractive gets dumped. Let’s check this out.
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Now let’s dive in.
All about the yield
As is often the case I get inspired by reading Peter Schiff’s tweets. This time what sparked this post is the following take from Peter regarding Tesla:
Alright, there might be many reasons why Tesla is coming down but their stake in Bitcoin is probably the smallest factor of them all.
How much did Tesla invest in Bitcoin? About $1.5 billion. That might sound like a big number but for comparison it’s only about 0.3% of the market cap of TSLA…
Do not mistake Tesla for MicroStrategy:
One is a tech company / car manufacturer that happens to have some Bitcoin in their treasury.
The other is a pseudo ETF for Bitcoin whose BTC holdings are worth 75% of their market cap.
So no, Bitcoin is not tanking Tesla. Of course Peter knows that.
The real reason Tesla is tanking is that all growth stocks are taking a hit when the US Treasury bonds yields are rising.
And rising they are.
Look at the 10-year. We started the year below 1% and 2 months later we are already close to 1.6%. That’s a 70% rise from very low levels.
We aren’t back to pre-pandemic levels but at this rate we’ll get there soon.
This is not limited to the 10-year. The whole curve is steepening.
As soon as you move away from the front end of the curve that is pinned down by the Fed, rates are skyrocketing.
The trend is even easier to spot if you look at how the yield curve has evolved since the start of 2020.
Check out the heat map below:
Each row is a bond term from 1 month to 30 years.
Each column from left to right represents the yield curve at a given date.
The darker the colour the higher the yield.
If you read the heat map from left to right you see that:
Before the start of the pandemic the lowest yield was around 1.2% for short durations and at most 2.5% for the longest duration.
At the start of the pandemic the Fed fund rate decreased pinning down the front of the curve pretty much at zero.
But while the Fed is maintaining the short term rates low you can see that the longer durations are getting darker and darker by the day.
The main reason behind this rise in the long term yields is that investors are putting two and two together.
The US Treasury department needs to issue more debt to finance Federal expenses of the type that risk creating inflation. Since all that matters is real yield (bond yield minus inflation) investors are demanding higher yields to compensate for that risk.
But higher yields create a whole lot of problems.
Since US Treasury bonds are considered to be the safest asset you can own, it is natural to use them as a benchmark.
If you can get paid a good yield with “no risk” why would you own gold, why would you own growth stocks like Tesla? The answer is, if you are managing institutional money, you wouldn’t. You’d take your safe yield and call it a day.
And isn’t that what we have seen last week?
The 10-year was up 8.33% (historically that’s a big move).
The SP500 was up 0.81%, but within the index growth stocks are down -1.2% while value stocks are up 2.87%.
The NASDAQ, heavy on tech/growth stocks, is down -1.87%.
Gold is down -1.74%.
But interestingly Bitcoin wasn’t affected by the rising rates: 10-year +8.33%, Bitcoin +8.36%...
See for yourself:
Each point is a weekly return (from close to close).
The higher the density the more weeks at a given level of returns.
The darker the colour the closer you are to the average.
The red line marks last week’s return of each asset.
The fact that Bitcoin seems to keep up with the rise of interest rates is definitely a good sign. This means that adoption remains the main driver of this cycle.
If you believe that to reach its natural market size (physical gold) Bitcoin has 10x more to grow then you aren’t worried about the temporary rising yield situation.
I’m saying temporary because you have to guess that the Fed will have to do something at some point. By something I mean implement some form of yield curve control.
Apparently we aren’t there yet. But if rising yields start causing serious problems for mortgages or trigger a new stock market crash then you can bet that as usual the Fed will act.
Let’s monitor and see how this plays out.
Drawdown
I’ve just said that Bitcoin is doing fine in the face of rising bonds yields but it is true that we are still in a drawdown.
Of course drawdowns are not unexpected in a bull market.
Every time you get a sharp rise in price some people will take profit, you’ll get a temporary correction and then we’ll be back up until traders are exhausted again.
That’s a natural function of the market, it doesn’t mean that the bull phase of the cycle is over.
In that regard this dip is typical of what we have seen in previous bull markets:
A 25% drop that has so far lasted 15 days.
The last one in January was 30% and lasted a month.
As you can see on the chart below drawdowns in the 20% to 40% range can last anywhere between a few days to 3 months. So if you look at the stats and think about the fundamentals there is really nothing to be worried about.
If you are playing the odds this is actually a good time to buy the dip if you haven’t done so already.
Only about 1 in 5 dips is deeper than 24%. Don’t wait forever for THE big one or you’ll never buy at all.
That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.
Cheers,
Nick
The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:
Click on the subscribe button right below.
Done? That’s great!
yields go up when bonds are being dumped... the treasury yield curve steepened because ppl were dumping longer dated bonds relative to shorter dated bonds ( which still have buying support from the fed through QE )
Another aspect that is fairly confusing is the irony of expectations of inflation driving the appreciation of the dollar relative to other currencies (DXY), which is putting selling pressure on the crypto market or at least forcing consolidation... however, it’s inflation risk that drives the crypto market, BTC in particular... so how do we parse out inflation that drives crypto and inflation that doesn’t? (lol)