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If the 10-year Treasury bond yield continues to soar, the confidence and expectations of Bitcoin and U.S. stock markets are difficult to reverse, or they will continue to fall.
Original title: “Ouyi OKEx Research Institute: The Impact of Rising U.S. Treasury Yields on Bitcoin”
Written by: OKEx Research Institute
The U.S. Treasury yield has recently increased significantly. In early January, the U.S. Treasury yield exceeded 1.0%. On February 25, the U.S. Treasury yield broke through 1.5%, rising by 50BP in less than a month, causing market shocks. The rise in U.S. Treasury yields is the result of a combination of inflation and real interest rates. From a supply-demand perspective, the Fed’s aggressive fiscal policy has slowed down supply and the gap between supply and demand for U.S. Treasuries is widening, and U.S. Treasury yields have therefore risen. From the perspective of real interest rates, the epidemic is effectively controlled and the launch of vaccines has an impact on the economy. The expectation of recovery has significantly restored consumer confidence; at the same time, fiscal stimulus has further boosted consumer demand, coupled with the fact that major oil-producing countries are still limited, and factors such as rising oil prices have exacerbated inflation.
The upside of U.S. bond yields will theoretically bring down the stock market. At present, the mainstream models for evaluating the intrinsic value of stocks mainly include the discounted cash flow model (DCF) and the discounted dividend model (DDM) model, but no matter which model, the final main influencing factor is the risk-free rate of return rf and the market Expected rate of return E(rm). The risk-free rate of return can be expressed by the U.S. Treasury yield, which acts on the WACC at the denominator of the DCF model and K_e at the denominator of the DDM model. Therefore, the increase in U.S. bond yields will reduce people’s expectations of the stock market. Analogous to high-risk assets, the price of Bitcoin will also be affected.
Under the background that U.S. Treasury yields continue to rise and even rise above the high of 1.64, the Fed is unlikely to make a sharp turn in its policy. Monetary easing will continue in 21 years. Even if the global central bank’s easing efforts will marginally slow down, the withdrawal of monetary policy will be gradual. . Investors’ long-term future inflation expectations have risen, and the stock market has risen overall, but highly valued assets have once again come under pressure. In particular, leading technology stocks have suffered severe damage, and precious metals such as gold and silver have also been weak in the past five weeks. In the case of oversupply of currencies and unsatisfactory alternatives such as gold, the digital currency market represented by Bitcoin has gradually moved towards the function of “digital gold”, showing a strong performance, even penetrating US$60,000 on March 13 This key node.
The 10-year U.S. Treasury yield is affected by the real interest rate and inflation rate
The yield of the Treasury bond market has become the benchmark interest rate in the financial market and a weather vane for investors to judge market trends. It can also be understood as the cost of funds in US dollars. Normally, when the Fed raises interest rates, the yield on the 10-year US Treasury bond will rise, and vice versa, the yield on the 10-year Treasury bond will fall. Recently, the Fed has been in a state of zero interest rate, and the U.S. bond yields have risen sharply, which means that there is a certain “first move” effect, reflecting the market’s expectations for the Fed’s quantitative easing policy.
From April to early August 2020, the yields of 10Y U.S. Treasuries remained stable at a low level of 0.5-0.7%. From mid-August to the end of January, U.S. Treasury yields started an upward trend. Since the end of January, the inflation rate in the United States has maintained a stable trend. Therefore, the rise in U.S. bond yields is mainly caused by real yields. Today, U.S. bond yields have exceeded 1.5%, causing financial markets to worry about inflation.
Figure 1 The rise in nominal, real yields and inflation rates of U.S. debt: January 2020 to present, source: Wind, OKEx Research Institute
Figure 2 The rise in nominal, real yields and inflation rates of U.S. Treasuries: October 2020 to present, source: Wind, OKEx Research Institute
The Fisher formula shows that the nominal interest rate is affected by the real interest rate and the inflation rate. Therefore, we will analyze the reasons for the increase in nominal interest rates from the two perspectives of the US real interest rate and the inflation rate.
The improvement of the U.S. epidemic has brought real interest rates up
The reason for the increase in real interest rates is that the emergence of vaccines has improved the epidemic in the United States. In mid-January, the number of confirmed cases of new coronary pneumonia in the United States reached a peak. Starting on the 15th, the confirmed cases have gradually dropped to the level of October last year. On the one hand, this is the result of the Biden administration’s anti-epidemic policies, including the implementation of mandatory masks and stricter lockdown measures across the United States. On the other hand, the United States has achieved better protection effects from vaccination: from December 14 last year. Today, the amount of vaccination implemented by the U.S. government is on the rise. Federal data collected by the US Centers for Disease Control and Prevention shows that as of March 11, 95.7 million doses of vaccine have been vaccinated, about 18.8% of the total population have received at least one dose, and 9.8% of the total population have been vaccinated with complete two doses. The United States currently injects more than 2.1 million vaccines every day.
3 Newly diagnosed cases of new coronary pneumonia in the United States have fallen, data source: Wind, OKEx Research Institute
Figure 4 The daily vaccination of the new crown vaccine has surged, data source: Wind, OKEx Research Institute
Loose monetary policy and fiscal stimulus have led to an increase in inflation
In addition, the increase in inflation rate has also brought about a rise in nominal interest rates. CPI can be used to measure the inflation experienced by consumers in their daily life expenditures. It is from the perspective of consumers and mainly focuses on the price changes of consumer goods. It is a lagging indicator to measure economic changes; while PPI stands for producers. Angle, measuring the inflation in the early production process, used to measure the leading indicator of economic changes. The PCE index takes into account the changing consumption habits of consumers with price changes, so it can better capture consumers’ shopping tendencies. It is the FED’s more biased indicator of inflation expectations.
Since the end of 2020, due to supply and demand gaps, global economic recovery, and low interest rates, commodity prices led by crude oil and copper have increased, driving the year-on-year growth rate of U.S. PPI to exceed expectations, thereby raising interest rates through nominal economic growth. Since October last year, the spot price of WTI crude oil in the United States has risen from US$40/barrel to US$65/barrel, a growth rate of over 60%. Crude oil, as the most upstream energy source, exerts cost pressure on downstream. If the oil price itself is excessively affected by supply factors, it will aggravate the risk of stagflation in the United States, and the risk of tightening the Fed’s policy will result in a spike in US bond yields. The price of copper rose from US$6,000 to US$8,400 today, an increase of about 40%. This resulted in a year-on-year growth rate of PPI exceeding 2.5%. After the first quarter of 2021, the marginal economic slowdown, the slight rebound in inflation expectations, and the structural tightening of credit policies belong to the transitional period from the recovery of the economic cycle to overheating and stagflation. The inflection point of general liquidity is coming.
Figure 5 Inflation rebounded at the end of 2020, source: Wind, OKEx Research Institute
Figure 6 Copper and oil prices rose at the end of 2020, source: Wind, OKEx Research Institute
In response to the huge impact of the new crown epidemic on the US economy, the US government has successively passed a number of fiscal stimulus bills from 2020 to 2021. In 2020, the United States passed three rounds of fiscal stimulus, and the new fiscal deficit totaled more than 2 trillion US dollars, accounting for 9.7% of 20-year GDP, including CARESACT passed at the end of March 2020, PPPHCE passed at the end of April and passed at the beginning of August. The second batch of unemployment payment plan (LWSPA). In 2021, the new U.S. President Biden and U.S. Treasury Secretary Yellen passed the “900 billion U.S. Dollar Stimulus Plan” and the “U.S. Relief Program Act” with a total amount of up to 1.9 trillion U.S. dollars, which is more than 8.7% of GDP. Among them, the proportion of personal subsidies and relief in 2021 (47.1%) far exceeds the level of 2020 (26.8%), reaching a total of nearly 900 billion U.S. dollars, becoming the year with the largest direct subsidies to residents in the history of the United States.
Figure 7 Government subsidy policy for the epidemic in 2020
Figure 8 Government subsidy policy for the epidemic in 2021, data source: Wind, OKEx Research Institute
The US$1.9 trillion fiscal stimulus policy is expected to strengthen and improve economic expectations and bring about a larger-scale US Treasury bond issuance. The upward pressure on US debt supply will mainly be reflected in the upward trend of interest rates. In addition, excessive fiscal stimulus has increased the imbalance between supply and demand of commodities, which will drive up the inflation of core commodities in the United States. From the perspective of commodity demand, fiscal subsidies will increase the income of individuals and companies, thereby promoting commodity consumption; however, on the commodity supply side, excessive unemployment subsidies will crowd out low-wage jobs and slow the recovery of industrial production. The demand for commodities is obviously greater than the supply, which will undoubtedly drive up the inflation of core commodities in the United States.
Figure 9 PCE in the United States in 2021 increased year-on-year, source: Wind, OKEx Research Institute
According to the “Monetary Policy Report” submitted by the Federal Reserve to Congress on February 19, the Federal Open Market Committee maintained the federal funds rate close to zero in order to achieve a maximum employment rate and inflation rate of 2% over a longer period of time. The Federal Open Market Committee (FOMC) has maintained the target range of the federal funds rate from 0% to 0.25% since March last year, and in the amendment issued in August, it reiterated that the inflation rate will remain at 2% in the short term, and It is expected to be more than 2% moderately within a period of time. Therefore, the market dispelled the idea of monetary policy changes in the short term.
Looking at the stock market and Bitcoin from the rise in U.S. bond interest rates
The increase in the risk-free rate of return affects the denominator end of the pricing model and lowers stock market expectations
As the most important risk-free interest rate level in the world, the U.S. Treasury bond yield is the “anchor” for the pricing of risky assets. As the US government adopted a radical fiscal policy of US$1.9 trillion, leading to a fiscal deficit, it is very likely to issue a large number of treasury bonds to increase revenue. From the Fed’s perspective, the supply of treasury bonds far exceeds demand, which undoubtedly led to U.S. bond interest rates. Soaring.
The traditional models for evaluating the intrinsic value of stocks mainly include the discounted cash flow model (DCF) and the discounted dividend model (DDM) model. The risk-free rate of return can be expressed by the U.S. Treasury yield, which acts on the WACC at the denominator of the DCF model and K_e at the denominator of the DDM model. Therefore, the increase in U.S. bond yields will reduce people’s expectations of the stock market. Analogous to high-risk assets, the price of Bitcoin will also be affected.
Table 1 Mainstream valuation pricing models, data source: Wind, OKEx Research Institute
The risk-free rate of return is often characterized by the yield of national bonds. National bonds rely on national credit and are generally considered risk-free under the premise of a relatively stable state government. At the same time, we usually believe that the market risk premium remains stable in the short term, so the market expected return rate also follows the change of the risk-free rate of return. In all aspects, the government bond yield has established the tone of risky asset pricing.
In addition, the global economic integration situation has become more mature. The United States has the largest GDP in the world for nearly 130 consecutive years. In 2020, it accounted for 24.82% of the global economy. Therefore, the status of the US dollar as an international currency is widely accepted, and the Fed’s status as a central bank is even greater. It is outstanding. On the basis of determining the Treasury bond yield as the risk-free rate of return, the U.S. Treasury bond yield has indisputably become the “anchor” of asset pricing in the global field.
The market predicts that the Fed will accelerate the change of current monetary policy, causing market panic
On the other hand, the U.S. bond yield is a key indicator for the market to predict the Fed’s monetary policy. Since the outbreak of the epidemic in 2020, the unemployment rate in the United States has increased significantly, and the financial market has been weak. In order to gradually recover the economy, the Federal Reserve has continued to increase debt, and U.S. bond yields have also risen. In the past period of time, U.S. bond interest rates have been operating at a high level. On March 11, the day after the Biden government’s 1.9 trillion fiscal stimulus bill passed, the U.S. bond yield even rose above 1.64%.
It can be found from the previous article that overseas vaccines have begun to spread, which undoubtedly provides a good environmental foundation for rapid economic recovery. In February, the CPI showed an upward trend, and the PPI rose more than expected. The unemployment situation improved moderately, consumer confidence was significantly restored, and the fiscal stimulus further boosted consumer demand. In addition, the major oil-producing countries remained restricted and oil prices rose. At present, it is no surprise that there is no suspense about the steady recovery of the US economy in 2021.
Figure 10 Consumer confidence is on the rise, data source: Wind, OKEx Research Institute
Figure 11 The unemployment rate in the U.S. has fallen back. The unemployment rate has dropped to 2.90% (unit: 1,000 people, seasonally adjusted), source: Wind, OKEx Research Institute
Market sentiment has also been appeased. In the recent public statements of Fed officials, almost no one believes that inflation will become a threat. Chairman Powell said that inflation will not rise sharply and continuously. At the same time, he believes that “the rise in U.S. bond yields is a manifestation of market confidence, indicating that the economy will recover strongly.” “It will take time for the economy to achieve substantive progress in employment and inflation.” The Fed’s policy is unlikely to make a sharp turn. Monetary easing will continue in 21 years. Even if the global central bank’s easing efforts will marginally slow down, the withdrawal of monetary policy will be gradual. .
Table 2 List of important views of Fed officials in March 2021, source: Wind, OKEx Research Institute
Many factors have superimposed, and the rise in U.S. Treasury yields “came into being.” Against this background, the global financial market fluctuated sharply, and the stock market as a whole rose, but highly valued assets were again under pressure, especially the leading technology stocks suffered severe damage. Nasdaq fell 78.81 on March 12, a decrease of 0.59%. , Closed at 13319.86, while the Dow Jones Industrial Average rose 0.90% to 32778.64, and the relative performance difference between value stocks and growth stocks returned to pre-epidemic levels.
Figure 12 On March 12, the Nasdaq fell 0.59% and the Dow rose 0.90%. Source: Wind, OKEx Research Institute
The digital currency represented by Bitcoin also performed strongly, accelerating its rise. On March 13, it penetrated the $60,000 node and reached $61,165.19, an increase of 6.80%. This aspect depends on its currency attributes have been strengthened, and institutional investors have joined successively, making the edge assets of Bitcoin and other digital currencies dominated by retail investors closer to mainstream assets; but to a greater extent, it is the rise in long-term market inflation expectations. Precious metals such as gold and silver have been weak in the past five weeks, and the increase is much lower than that of Bitcoin. In the case of oversupply of currencies and unsatisfactory alternatives such as gold, the digital currency market represented by Bitcoin has gradually turned to “digital The function of “gold” is advancing.
Figure 13 Gold, silver and precious metals are under pressure, and Bitcoin has risen significantly. Source: Wind, OKEx Research Institute
The current status and future of the Bitcoin market
The current Bitcoin bull market is a product of high inflation expectations. On the one hand, due to the impact of the epidemic, the recovery of the global economy will slow down in the next year; on the other hand, the central bank’s extremely loose monetary policy has pushed up inflation expectations in the financial market. In the high-inflation economic environment, in order to avoid the loss of nominal principal and the need to pursue higher returns, institutional investors have increased their demand for Bitcoin. Similarly, when the global economy begins to recover, the monetary policies of major central banks begin to tighten, and market inflation expectations change, institutional investors will sell bitcoin, triggering a sharp drop in bitcoin prices.
When U.S. stocks fell due to the rapid increase in 10-year Treasury bond yields, Fed officials quickly came out to appease market sentiment and issued a statement that the increase in 10-year U.S. Treasury bond yields was “appropriate” and reflected the economic recovery. Monetary policy will be changed, the market’s concerns about monetary policy changes will be dispelled, and market inflation expectations will be revised. In the short term, if the above remarks of Fed officials can successfully calm the market sentiment, then the prices of U.S. stocks and Bitcoin will get a certain recovery in the short term; but if the yields of 10-year Treasury bonds continue to soar, market confidence and expectations will not be possible. Is reversed, then the plunge will continue.
The US policy adopted a fiscal stimulus package of 1.9 trillion yuan. Fiscal stimulus measures on an unprecedented scale will stimulate the growth of social demand, push up commodity prices, and boost global inflation expectations for a period of time.
Oil prices are an important exogenous shock factor that affects inflation in Europe, the United States and other countries. Affected by the production restriction policies of major oil-producing countries and the gradual recovery of the global economy, oil prices are gradually rising, which will bring inflationary pressure to major European and American economies.
With global electric vehicle giant Tesla, the world’s largest asset management company Blackstone Group, Norwegian oil giant Akar and other companies investing in Bitcoin, Bitcoin is gradually evolving from a niche alternative investment in the past to a “digital gold” for the masses. Benefiting from the good results of epidemic prevention and control in various countries and the stimulus of the US fiscal policy, the global economic recovery is expected to be strong. Against the background of high inflation expectations in the future, Bitcoin with a fixed total cap has become a good asset against inflation, and has been influenced by the market. Sought after, prices are constantly rising. It can be expected that if the economy continues to recover in the second half of this year and the tone of loose monetary policy remains unchanged, then Bitcoin is likely to rise again.