- Treasury yields have started to move aggressively higher
- Bitcoin hit $50k for the first time and continues to soar
Yield hikes start to worry
Having banged the inflation drum for some months, last Monday I noted that everyone’s suddenly talking about it. Now rates are really starting to worry. We are witnessing a sharp sell-off in rates with yields moving aggressively higher, which could spread into trouble in other asset classes like stocks, foreign exchange and even cryptos. This creates problems mainly because of just how quickly the move is happening. Treasury yields had their biggest gain in three months on Tuesday, with spread on ten year treasuries rising 9 basis points to hit the highest since February above 1.3 per cent. The 2s10s spread widened to 1.18 per cent, the widest since 2016. Breakevens keep moving higher - inflation expectations are becoming unanchored.
I’ve expounded many times before on how the vast amount of pro-cyclical fiscal stimulus, ultra-loose monetary policy, pent-up demand and a savings glut will create a powerful inflationary impetus this year. I’ve also stressed many times that this environment, coupled with the Fed’s new average inflation targeting – which explicitly lets the economy run ‘hot’ - could lead to inflation expectations becoming unanchored, just as they did in the 1970s. If inflation does start to move up the Fed may need to act. Allowing inflation to take off could eat away at real gains, but it will also help erase deficits. The question the Fed – and Treasury – need to ask themselves is whether deficits matter.
Knock-on impact on stocks
The ProShares UltraShort 20+ Year Treasury ETFs, which tracks double the inverse (-2x) of the daily performance of the US Treasury 20+ Year Bond Index for a single day, is exploding higher and is now up almost 20 per cent this year. Vix March futures also advanced during a mixed session on Wall Street that left the Dow up 0.2 per cent but the S&P 500 flat and small cap Russell 2000 0.7 per cent lower. Higher rates hit bond proxies like real estate, utilities and health, whilst the chief reflation trade winners, energy and financials, rose.
Stocks in Europe are sliding a touch this morning after Tuesday’s pause. Concern about interest rates moving up as quickly as they are is starting to worry some investors. It’s not the absolute yield that matters but the rate of change which is catching investors off guard. UK inflation nudged up to 0.7 per cent in January from 0.6 per cent in December as the cost of furniture and household goods, restaurants and hotels, food, and transport all rose. This is just the start though as the roaring 20s leads to roaring inflation by the end of the year. UK 10 year gilt yields are also at 1-year highs above 0.6 per cent.
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Bitcoin rally blunders on
Bitcoin hit $50k and has kicked on to $51k – as mentioned yesterday the market is looking a lot different to how it did back in the 2017 bubble. Fundamentals remain problematic, but the market can remain irrational longer than shorts can remain solvent. Microstrategy – a business ‘intelligence’ company – said it plans to offer $600m of senior convertible notes in order to buy more Bitcoin. To be fair, its bet last year on Bitcoin was a good one. It now owns 72k Bitcoin worth $3.6bn. Remember last year this started with an acquisition of 21,454 Bitcoins as part of its capital allocation strategy. Yet more corporate backing.
Meanwhile gold is weaker as yields (nominal rates rose faster than inflation expectations yesterday, pushing up real rates) and the dollar rose with prices testing the Feb 4th low at $1,784, with the key 50 per cent Fibonacci retracement and 30 November low sitting at $1,764.
In FX, it looks like the move in yields has provided some respite for the dollar. Sterling has just come off its newly hit 3-year high at 1.3950 to put in a couple of near-term support markers around the 1.36860 area. Just some emerging signs of a bounce shaping up on the hourly chart. Dollar index making a fresh swing high.
Neil Wilson is chief markets analyst at Markets.com
