Friday, Oct 6, 2023

higher yields and crypto, lessons learned, upcoming treasury issuance and more

“I refuse to answer that question on the grounds that I don't know the answer.” – Douglas Adams  ||

Hello everyone, and happy Friday! Today’s is a short one since it has been an EXHAUSTING week and I am so glad it’s the weekend tomorrow. My dog agrees.

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IN THIS NEWSLETTER:

• Higher yields and equities

• Higher yields and crypto

• Okay, I do have to mention SBF after all

• Upcoming Treasury issuance

WHAT I’M WATCHING:

Higher yields hurt other assets

What with all the bond market turmoil this week, I hadn’t been checking in on rates expectations. So this morning I did, and it looks like investors now assume that the markets have done the Fed’s work for it: higher bond yields should be enough to squeeze inflation into submission without the need for more official rate hikes. CME futures are signaling only a 25% probability of one more hike this cycle. The timing of the first rates cut is less clear, but is being priced in at the June or July meetings.

(chart via CME FedWatch)

Why it matters:

Why would higher US treasury yields help to bring down inflation? It’s largely because of the tightening effect on the entire economy.

1. US treasury yields form the basis for the pricing of corporate debt, and it is now much more expensive for companies to raise debt financing. Bank loans are harder to come by also. If companies can’t easily raise finance, they spend less, cancel expansion plans, perhaps even reduce costs such as payroll. Less spending into the economy, plus a likely impact on the jobs market. Higher unemployment hits consumer spending hard.

2. US treasury yields impact the equity market in various ways: