The reason why it is essential to pay attention to the bond market is because it is much larger than equities. Further, it also leads the way and shows stocks how to behave. The bond market is essentially the debt market. Now, the debt markets flow or originate from treasuries, which note the risk-free rate on government securities, in turn setting rates for private companies and their issues of debt. The key point in the present moment is that interest rates post the COVID-19 announcement in March 2020 continues to tick up. That is not necessarily a great sign for stocks and other asset classes that rely on cheap debt to grow fast. Remember that yields rising is not in itself a sign of distress but that couple with the elevated state of the markets and blow ups of family offices like Archegos are concerning. It is even more concerning in a time when the economy is unhealthy, and investors look like they are taking risk on everything across the board.
A close encounter with reality may be quite a surprise for those that have taken on a risk-on appetite over the past few years.
The Ten Year Treasury Government Security Yield Is Rising
A keen observer will notice that the ten year treasury trended up yesterday and made a high of 1.746. Market observers pay close attention to the ten year treasury yield because it shows the expectations of rates for the near term future. The higher that it climbs, the higher it shows that marker participants want more yield for the risks that they are taking with the treasury security. It also shows that bond market participants may see other opportunities in other asset classes like equities, gold, silver, bitcoin, and commodities in general. At the present moment, there is a yield spread narrowing between the 10 YR and the 30 YR but some analysts like Peter Schiff expect it to widen over time. The more that this spread widens, the likelier the chances of correction in the equities market. But why is that?
The Market Frenzy Stems From Yield Thirst
Market participants are concerned about small levels of inflation. The government targets at least 2% inflation on an annual basis, it has yet to reach that target. Still, the value of the dollar is declining slowly over time as one can witness inflation in the the currency each year. But at the same time, as noted above, government treasuries only provide a minuscule amount of yield. It follows then, that your large bank and small bank will only provide a small portion of yield on your cash held at the bank. If you do not get anything for saving your cash at the bank, and hedge fund managers like Ray Dalio state that “cash is trash”, then where do you turn? You turn to equities or stocks that will grow like crazy. Others purchase real estate. Then more speculative or forward thinking individuals purchase bitcoin, ethereum, and maybe a few other digital assets for the long-term.
The key driver is that they need yield to preserve their value and grow their wealth. If you hold cash, you are stating that you do not mind buying less goods over time as your dollar value declines and cost of goods and services gradually go up. Individuals expect that the yield on treasuries and bonds will stay at depressed levels as it has over the the past decade. The next decade, with respective to yield, should be the same, and experts state to think about real estate, gold, commodities, bitcoin and bond alternatives to preserve and grow wealth.