10-year Treasury yield rises – What it means

10-year Treasury yield briefly pulls out 4.0%…who’s buying bitcoin and what does it mean…can we ignore Sahm’s Rule this time?

It’s been a week full of news. Today, let’s look at three stories that will likely affect your portfolio.

Keep an eye on the 10-year Treasury yield

On Monday, the most important number in investments – the 10-year Treasury yield – hit a multi-month low of around 3.67%.

By yesterday it had risen again, briefly resuming 4.0% (as I write Friday morning, it was down to 3.94%).

What is behind the growth?

Part of the answer comes from Wednesday, and a small detail that most investors missed. It also helps explain Wednesday’s painful reversal in the stock market, which took the Nasdaq from “up 2 percent” to end the day “down 1 percent.”

Behold MarketWatch:

An auction of 10-year Treasuries was poorly received early Wednesday afternoon, sending yields higher and appearing to take the momentum out of the rally in stocks.

The $42 billion auction of 10-year notes was reportedly 3 basis points higher. If you’re less familiar with the term, a “tail” is the difference between the bond’s yield before the auction and the yield that buyers are willing to trade at during the auction.

That was the bond market’s way of saying, “No, if you want us to buy all these Treasuries, you have to sweeten the deal.”

The pattern repeated itself on Thursday, when the 30-year bond auction was met with below-average demand. In this case, the tail was 3.1 basis points.

Analyst Jim Bianco points out that it was the “seventh-worst monthly long bond auction since Covid.”

From a short-term perspective, this is just noise and is unlikely to influence the Fed’s interest rate policy

Here’s legendary investor Louis Navellier from yesterday’s Flash Alert podcast Growing Investor.

The 10-year bond auction wasn’t perfect. So it shows that if yields get too low, nobody wants to buy the bonds.

But bond yields are still much lower than they were a few weeks ago, as are two-year notes. So the Fed is still under pressure to cut (interest rates).

From a longer-term perspective, this is another piece of information that points to a “new normal” of higher bond yields. The lower yields of the 2010s contributed enormously to the epic bull run of that decade.

As we went through here, in Digestour government is broke and needs more money to pay all the promised obligations. Tax revenues alone are woefully insufficient. So our government financed the deficit through debt – its treasury market.

As you can see below, we’ve had a burst of Treasury issuance since 2020.

Source: MacroMicro

The problem is that when a new Treasury issue floods the market, the oversupply results in the lower prices that are needed to attract buyers (as happened on Wednesday and Thursday). And since bond prices and yields are inversely correlated, that means bond yields are rising.

That’s not good for stocks or federal government debt service (and ultimately, the dollar value of your savings).

Remember – in 2020, the cardinal direction of the 10-year Treasury reversed for the first time in forty years…

Source: Macrotrends.net

If this trajectory continues – as it has over the past four years – it will be the biggest influence on your portfolio this decade.

Moving on to the crypto market, the “tale of two investors” plays out.

Cryptocurrency investors have had a painful summer.

While hopes were high for a rise after the halving in the spring, the opposite happened. Due to several factors that I have detailed in various digestthe price of bitcoin and top altcoins crashed.

But there is an interesting story unfolding beneath the surface…

While small investors shed their bitcoin holdings, large investors quickly piled in.

from CoinDesk:

Bitcoin (BTC) investors endured a (mostly bearish) rollercoaster ride as prices fell over the weekend to $49,000 by early Monday before rebounding modestly to around $56,000 in US morning hours, triggering various reactions from owners.

Bitcoin whales, or large holders of the asset, seized the opportunity to buy lower prices, while small investors sold as panic ensued, data from blockchain analytics firm IntoTheBlock shows.

Crypto wallets holding between 1,000 and 10,000 BTC, worth about $56 million and $560 million at current prices, “showed confidence during the recent decline, steadily increasing their holdings as prices fell” , IntoTheBlock analysts said.

Meanwhile, wallets with less than 1 BTC “showed weak hands, with the most substantial drop in holdings during yesterday’s market downturn,” they added.

In yesterday’s Digestwe looked at how small retail investors sold stocks during this week’s volatility, while institutional investors bought with the carryover punch. Clearly, the same dynamic is playing out in the crypto market.

Be on your guard against such fear-based knee-jerk selling. Remember – crypto and volatility go together like peanut butter and jelly. So unless you’re up for some painful pulls, stay away.

But if you ride the rollercoaster, history suggests the reward will be worth it, despite the bears proclaiming “bitcoin is dead” every time it crashes (before hitting a new high later).

As for where bitcoin will end up, let’s check in with our crypto expert Luke Lango. From his weekend update in Crypto Investor Network:

In the short term, BTC is forming a converging triangle pattern between the late 2022 uptrend support line and the March 2024 downtrend resistance line.

The two lines will converge by September. Between now and then, we expect BTC to either stage a downward breakdown of the late 2022 uptrend support line or an upward break of the March 2024 downtrend resistance line. We favor the latter.

Source: Bloomberg

We generally feel optimistic then.

We understand that the price action has been frustrating. But we think patience will pay off here. Fundamentals support higher prices. We just have to play the waiting game for now.

Finally, can we ignore this major recession indicator?

For the past few months, we’ve been highlighting the “Sahm ​​Rule.”

Named after Claudia Sahm, former Federal Reserve economist and originator of the indicator, the “Sahm ​​Rule” compares the latest three-month average of the unemployment rate to the lowest three-month average in the past year.

When the latest three-month average is 0.5 percentage points higher than the lowest three-month average, the Sahm Rule is triggered, suggesting the start of a new recession.

Since 1950, there has been only one false positive (in 1959). But even then, the US entered a recession six months later. The indicator correctly signaled the other 11 recessions.

One week ago today, the Sahm rule was triggered when the value reached 0.53.

But is this a case of “this time it’s different”?

According to Apollo’s Torsten Slok, yes:

The upward trend in immigration continues with near-record levels of immigrant visas issued each month…

Perhaps the reason the unemployment rate is rising is that the government is gradually working through a backlog of visa applications caused by Covid, which increases the labor supply.

The source of the increase in the unemployment rate is not job cuts, but an increase in labor supply due to increased immigration.

This is why the Sahm rule does not work. The Sahm Rule was designed for a decrease in labor demand, not an increase in immigration.

If Slok is right, we can confirm this by looking at the job cuts. However, when we do, we get a mixed result.

Supporting Slok’s point is the chart below from executive placement firm Challenger, Gray & Christmas, which shows a low level of announced job cuts. We are looking at a four-year period dating back to 2020.

Source: Challenger, Gray & Christmas

But working against Slok’s point is how the graph is skewed by the peak of the pandemic.

If this were excluded, it would be easier to see that today’s value is 9% higher than where we were a year ago at this time. It’s also the highest monthly total of 2020.

Furthermore, if we shift our focus from “announced job cuts” to “hiring plans,” we find weakness.

From Challenger, Gray & Christmas:

U.S. employers announced plans to hire 3,676 workers in July… It’s the lowest July total since Challenger began keeping detailed job announcements in 2009.

For this year, employers announced plans to hire 73,596 workers, the lowest total since the start of the year in 2012, when 72,858 hiring plans were recorded.

With this in mind, while we hope that Slok’s claim is correct, we continue to view the recent triggering of the Sahm Rule with great respect and caution.

To be clear, this does not mean exiting the market. But, tying back to yesterday Digestmeans you should reacquaint yourself with why you’ll ignore the volatility of your long-term “hold forever” stocks…and why it’s essential to have and follow stop-losses on positions you don’t own with a firm conviction. That way, if the rally we’re enjoying today fizzles out, you’re covered either way.

We’ll keep you posted on all these stories here in the Digest.

good evening

Jeff Remsburg