In an interview with the British “Financial Times”, Bridgewater Co-Chief Investment Officer Bob Prince said that the recent wave of U.S. debt selling is likely to accelerate, which will affect all companies including SPAC (Blank Check Company) stocks and cryptocurrencies. Risky assets pose a threat.
In Prince’s view, the U.S. stock market ushered in the SPAC boom and the soaring prices of digital currencies such as Bitcoin were all caused by the Fed’s loose monetary policy and the approval of the large-scale stimulus plan by Congress. The rebound actually depends on whether the Fed encounters constraints such as inflation and currency deflation.
With the improvement in US economic growth, inflationary pressures will force the Fed to reduce stimulus measures, and the US bond market with a scale of up to 21 trillion US dollars is about to see a new wave of downturn.
But he also pointed out that regardless of whether the Fed chooses to prevent inflation from continuing to rise, or does nothing about it, investors will be “injured.”
“Either U.S. Treasury yields rise or the U.S. dollar depreciates. This is the risk of the second stage of the U.S. Treasury trend.”
Why is it important?
The anchor of global risk asset pricing
As the most important risk-free interest rate in the world, in a sense, U.S. bond yields can be used as an anchor for global risky asset pricing (stock assets).
Due to the profound impact on various assets, the recent rapid rise in U.S. bond yields has aroused market attention.
Under the influence of the four major factors that Biden signed the 1.9 trillion US dollar stimulus plan, accelerated US vaccination, economic data exceeding expectations, and SLR (bank supplementary leverage ratio) relaxation policy is about to expire, the US debt auction was slightly stabilized in the middle of last week. The yields of U.S. Treasuries have rekindled their rebound momentum.
Last week, the benchmark 10-year U.S. Treasury yield rose through 1.64% for the first time in a year, the highest level since February last year. There is a slight downward trend now, but it still remains above 1.6%.
How long does it last?
The market will not be calm until the yield reaches 2%
Volatility in U.S. Treasury yields affects the nerves of the global market, so when will this situation continue?
Kit Juckes, a global macro strategist at Societe Generale, believes that there will be no peace in the market before the 10-year U.S. Treasury yield reaches 2%.
Juckes said that rising yields have caused the US dollar to regain strength. He is not eager to fight the US dollar. As the yield rises, the US dollar rises, but when the yield stabilizes at a new level, the US dollar will fall back. This model may continue until the bond market reaches equilibrium, but it is unlikely before the 10-year Treasury bond yield reaches 2%. This is judged by the reduction of panic and past cycles.
Shen Xinfeng’s team at Northeast Macro believes that an important resistance to U.S. bond yields is at the high point before the epidemic, at 1.94%. This is the highest point since the U.S. entered the interest rate cut cycle in 2019. If the U.S. Treasury yield rises above this position, it largely means that it has broken through the limits of the “interest rate cut cycle” and entered the field of the previous interest rate hike cycle.
How big is the impact?
Exchange rate, stock market, gold…what’s the trend?
1) Exchange rate: USD/JPY and EUR/CHF are the most sensitive
Kit Juckes, a global macro strategist at Societe Generale, pointed out that USD/JPY and EUR/CHF are the currency pairs most sensitive to the trend of U.S. bond yields. More specifically, the USD/JPY has a stronger correlation with real interest rates, while the EUR/CHF has more correlation with nominal interest rates.
According to Juckes’ observations, four yields this year—real and nominal yields, dollar/yen yields and euro/Swiss franc yields—have basically increased simultaneously.
Juckes predicts that if the 10-year Treasury bond yield reaches 2% in the next few weeks, it may push the USD/JPY to 111 and the EUR/CHF to 0.96.
2) Stock market: the possibility of a sharp drop is unlikely
In response to concerns about whether the U.S. Treasury yield in the market will impact the stock market, Goldman Sachs analyzed and analyzed that the current stock valuation should easily resolve the 10-year U.S. Treasury yield that exceeded 2%, but the premise is that the U.S. Treasury yield rises slowly. And controllable.
In specific sectors, Goldman Sachs recommends that investors pay close attention to the energy and financial sectors.
Shen Xinfeng’s team at Northeast Macro believes that in the context of rising U.S. bond yields, a full-scale bear market in U.S. stocks and A-shares is unlikely to occur, and it is more likely to be a structural adjustment. In the first half of the year, when the U.S. Treasury yields have higher risks of upside, the A-share procyclical industry may be relatively dominant. In the second half of the year, as U.S. Treasury yields slowed down, high-value sectors such as core assets may regain momentum.
3) Gold: Upside space will be further curbed
Due to the high correlation between the actual rate of return and the price of precious metals, when the actual rate of return tends to rise, the performance of gold will be suppressed accordingly.
Earlier in the exclusive article “Bull Commodity Bull Market Blows, Where is the Gold Going?” an exclusive article for members of Jianzhi Institute. “As mentioned in the article, especially if worries about the normalization of monetary policy surface again in the second half of this year, the upside of gold prices will be further curbed.