U.S. stocks closed on February 25 with the three major indices closing down collectively, with the Dow down 1.76%, the S&P 500 down 2.45% and the Nasdaq down 3.52%. Especially the Nasdaq, the first two days of a substantial rally was almost swallowed clean by a large negative line, technical patterns re-entered the down channel.
To say how fierce the U.S. stocks fell this Time, the panic index, which benchmarks the future trend of the S&P, can be seen. At one point that day, the panic index surged 44%, which represents the degree to which the market reacts to risk. I’ve been long the Panic Index for some time, so I’ve been paying close attention to this data. After the panic index may also have substantial fluctuations, a few years of big drop may only be the beginning.
Driving the day of the U.S. stock plunge, I think the main U.S. 10-year Treasury yields are not normal big rise. At one point, the yield on the 10-year U.S. Treasury note topped 1.6%, reaching its highest level in more than a year. The yield on the benchmark 10-year U.S. Treasury climbed to 1.614%, the highest level since Feb. 14, 2020. The yield on the 30-year U.S. Treasury rose to 2.323%. The yield on the 5-year U.S. Treasury note touched 0.862 percent, the highest level since March 3 last year.
Recently there have been hints of risk in U.S. stocks, and the most important indicator of concern is the yield on the 10-year U.S. Treasury. You may be wondering, what is this indicator? Why must we pay attention to this?
Because the U.S. ten-year Treasury yield is the pricing standard for global assets and is the anchor for global assets. Whether it is the valuation of property, stocks, bonds, or global Exchange Rates, the cost of debt, and credit, etc., all basically have to refer to the U.S. 10-year Treasury yield. In the case of stocks, a company’s stock valuation is high, its debt burden is heavy, and its future growth potential is determined by the trend of the U.S. 10-year Treasury yield. The basic logic is that when interest rates rise, the valuation of a public company will fall and the stock will have to fall. High-tech companies, in particular, are more affected by high interest rates. High interest rates tend to hit the tech sector particularly hard because the sector relies on easy borrowing to achieve high growth. Once the cost of issuing debt becomes higher and the cost of capital becomes more expensive, it will squeeze the company’s profits, which is the main reason why this major correction in U.S. stocks driven by Treasury yields, the Nasdaq fell more aggressively than the Dow.
A way higher interest rates will affect the future earnings growth of U.S. companies, thus putting pressure on the stock valuation itself. In other words, if stock prices do not match valuations, when yields rise, the U.S. stock valuation “bubble” is likely to burst, triggering a decline in U.S. stocks.
Then why the U.S. 10-year Treasury yields will suddenly soar? The main reason is that the market expects Inflation in the U.S. to move upward. Because the Epidemic in the U.S. is beginning to ease, expectations of an upswing in the economy have increased, especially with Biden‘s $1.9 trillion stimulus package and the potential for trillions in infrastructure construction in the future, which will significantly boost U.S. economic growth. When the epidemic is unsealed, everyone will come out to get money to spend and travel, and all the money distributed by the U.S. economic stimulus plan will flow into the market, as well as the minimum wage increase, which will also significantly raise inflation.
We know that the real interest rate of the market can be said to be equal to the ten-year yield on U.S. bonds minus inflation, and once inflation comes up, the little interest you get from buying U.S. bonds is not enough for inflation, and by then the money you get your hands on can be said to be negative. So this time, everyone does not buy U.S. bonds, not only do not buy, but also sell off. Coupled with last year’s 3 trillion stimulus, this year’s 1.9 trillion stimulus is basically to issue U.S. bonds, U.S. Treasuries at once too much supply, the buyer’s power is not enough, the price of Treasuries will only plummet, the U.S. ten-year bond market boom era is basically over, Treasury yields began to rise sharply, bringing huge adjustment pressure on global risk assets.
Then some friends may say, no one to buy treasury bonds well do ah, the Federal Reserve to buy more vigorously is not finished? We know that the U.S. Treasury bonds are publicly issued in the market. The Federal Reserve only holds less than 30% of the U.S. Treasury bonds, the remaining 70% are basically held by the U.S. public and foreign governments. If the public does not buy bonds, relying solely on the Fed to buy, which is not working, the Fed must buy more than 20 trillion U.S. Treasuries, which will certainly turn the dollar into paper. Therefore, the Fed can influence the purchase of treasury bonds, the appropriate impact on the yield of treasury bonds, but can not completely control. This influence is called the Treasury yield curve control. Powell has actually spoken out long ago, hinting that it will intervene when Treasury yields move up significantly.
Since February, the global economic outlook is improving, market inflation expectations are moving higher and higher, and investor selling of bonds is intensifying, causing yields to move up quickly. And it is not only the Fed, but also major countries around the world, such as Europe, Japan and Australia, where long-term Treasury yields are moving up significantly, which is a huge pressure on global stock markets, and this could be a global phenomenon. Australia’s 10-year Treasury bond yields have risen from a low of about 0.7% to about 1.69%, back to 2019 levels. The RBA had to buy $3 billion in Treasuries to suppress the rapid rise in yields. This is the bond yield curve control mentioned earlier. Yields on U.S. bonds are now spiking rapidly, and sooner or later the Fed will do the same.
U.S. bond yields soaring, less than March may be to 1.50%, not good enough to exceed 2.0% in the middle of the year. This is actually the Fed losing control of the long end of interest rates. The Fed can control short-term interest rates, but it simply can’t control the long end of rates unless it does yield curve control. Now it is actually the market in the long end of the rapid rate increases, the Fed even if the intervention may not help.
The latest Fed official Bostic said he was not worried about rising Treasury yields and that interest rates were still very low from a historical perspective. Fed Chairman Powell is still regulating with his mouth, and two days ago was saying there is no inflation, it will take three years for inflation to reach the 2% target, and not worried about rising risk-free rates. Said any changes to QE will be communicated to the market and will continue to remain accommodative. It can be said that this is also talking with his eyes open, and he is still using the Fed’s only remaining credit in influencing the market. But now he shouted once can only manage two days of time. The first two days of the U.S. stock market plunge out shouting, the decline are pulled up. No shouting today, solid and fell down, indicating that the current Fed chairman’s credibility is getting worse.
The market has realized that Treasury yields are rising so much, not on optimistic expectations for the economy, but on inflationary concerns and distrust of the Federal Reserve.
The Democrats came to power spreading money like the so-called saviors, and regardless of the U.S. debt burden and market inflation. Anyone can spread money, but what if it becomes the stagflation of the 1970s and the economy stagnates for 10 years? Will history still give the United States a Volcker and Reagan combination? Who will raise the dollar interest rate to 22% to burst the bubble? If there is another big stagflation in the US, my feeling is that the Fed will play along with the dollar.
Powell will probably be the worst Fed chairman in history, doing whatever the government tells him to do, without any independence. Inflation should be the Fed’s primary goal, but right now inflation is being ignored by the Fed. Powell said the increase in QE would be communicated to the market, but the Fed’s half-month QE in February exceeded 60% of January’s. How is this massive increase in QE not communicated to the market? Did not the Fed say that rising Treasury yields reflect optimistic economic growth expectations happy to see it? Why is it still increasing QE and suppressing yields? Commodities have hit multi-year highs, with oil prices soaring, copper up 38% in the short term, plastics up 35%, aluminum up 37%, iron up 30%, glass up 30%, zinc alloys up 48%, stainless steel also surging 45%, and Food, daily necessities, many on the rise.
Inflation can really wait three years? How much of a loss do intermediaries have to bear to keep terminal prices from rising? Once the price of upstream commodities is fully transmitted down how to do? Sooner or later, the Fed will not be able to squeeze Treasury yields with its mouth, and everyone will finally realize that inflation is coming. After the passage of Biden’s $1.9 trillion stimulus plan, the Treasury issued a trillion dollar amount of debt in the second half of the year. The balance of supply and demand for U.S. Treasuries will be broken.
Now, the anchor of global asset pricing U.S. 10-year Treasury yields are still soaring, reacting to the market’s expectation of dumping U.S. debt to fight inflation. If the Fed prints a lot of dollars to buy U.S. bonds and intervenes in Treasury yields, then it could be the beginning of hyperinflation, a hyperinflation that the U.S. brings along with the world.
Indiscriminate issuance of money is squandering the credit established by the Fed for a century, global asset prices will go to the bubble!
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