Tag Archives: Bonds

by | September 17, 2024 · 5:35 pm

What will happen in the stock and crypto market if the FED cuts the interest rates?

Investors are watching the FED on Wednesday, and they are all but certain the FED will cut interest rates. But how much? 25 points or 50 points? That`s the real big debate among investors right now. But regardless, what will happen to the stock and crypto market if the FED cuts the rates?

There is more than 60% probability that the FED will cut the rates by 50 basis points. When the FED cuts interest rates, it typically impacts the stock market in several key ways.

Lower interest rates reduce borrowing costs for companies, which can lead to higher profitability due to cheaper access to capital. This generally encourages investment in stocks, driving prices higher. Sectors like technology and consumer discretionary tend to benefit the most from lower rates as they are more reliant on borrowing for growth.

Reduced rates also make loans and mortgages cheaper for consumers and businesses, encouraging spending and investment. This increased spending can lead to economic growth, which is positive for corporate earnings and stock prices.

In addition, growth stocks, especially in tech and innovation, often outperform because their future earnings are more heavily impacted by interest rates. Lower rates increase the present value of their future earnings, making them more attractive to investors.

At the same time, bond yields typically fall, making bonds less attractive compared to stocks. Investors may shift their portfolios from bonds to equities in search of better returns, which can push stock prices higher.

On top of all that, the risk appetite increase. Lower rates often reduce the returns on safer investments like savings accounts or Treasury bonds. As a result, investors may take on more risk by moving into stocks, which offer the potential for higher returns.

But keep in mind, that market reactions can vary!

What happens in the market is also psychology, and you will never know where the rabbit is jumping. A lot of investors are full of recession fears. If the FED cuts rates in response to a slowing economy or recession concerns, the stock market might react negatively if investors see the rate cut as a sign of underlying economic trouble.

On top of that, you have a lot of inflation concerns. If rate cuts are perceived to spur excessive inflation, it could lead to volatility in markets, especially if inflation erodes corporate profit margins.

In summary, while rate cuts generally boost the stock market, the context and economic conditions surrounding the decision play a crucial role in determining the actual market response. Not only that. It can also have a notable impact on the crypto market, similar to how it affects traditional financial markets.

The risk appetite in the crypto market will increase. Lower interest rates typically reduce returns on low-risk assets like bonds and savings accounts. This often leads investors to seek higher returns in riskier assets, including cryptocurrencies. As a result, crypto prices, particularly for Bitcoin and Ethereum, could rise as investors move capital into digital assets.

A rate cut can also weaken the U.S. dollar, as lower rates make the currency less attractive to foreign investors. Cryptocurrencies, particularly Bitcoin, are often seen as a hedge against currency devaluation. A weaker dollar could boost demand for Bitcoin and other digital currencies as an alternative store of value.

Improved liquidity comes on top of all this. Lower borrowing costs mean individuals and businesses can access cheaper captal. Increased liquidity in financial markets often benefits speculative assets like crypto, as more people can invest and trade.

Cryptocurrencies are often viewed similarly to growth stocks-assets with high potential but also high risk. Lower rates typically benefit growth sectors since the future value of earnings becomes more appealing. This may lead to surge in the crypto market.

Not only that. A FED rate cut can encourage institutions to diversify their portfolios, including moving into digital assets. As traditional investment returns diminish, institutions might allocate more to Bitcoin, Ethereum or other cryptocurrencies.

But, like the stock market, there are potential risks in the crypto market as well.

If the rate cut fuels inflation, it may lead to instability in traditional markets, which could spill over into the crypto space. Inflation could either positively affect crypto as a hedge or introduce volatility if the overall economic outlook worsens.

While rate cuts generally boost risk assets, they could signal economic weakness, which may also introduce market uncertainty. Cryptocurrencies can be highly sensitive to shifts in sentiment, reacting both positively and negatively to macroeconomic trends.

Overall, a FED rate cut is likely to boost the crypto market, especially if it leads to increased liquidity and risk-taking behavior among investors. The fear index is still below 20 (17,61) as of writing on Tuesday. Where will it end later in this week?

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shinybull.com. The author has made every effort to ensure the accuracy of the information provided; however, neither Shinybull.com nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities, or other financial instruments. Shinybull.com and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | December 5, 2018 · 4:01 pm

The wide spread between the 2-year note and the 10-year note is around 10 basis points which is the flattest since 2007

The stock marked plummeted on Tuesday with Nasdaq down near 4 percent. This is scary for many investors around the world. More scary is a quick look at the 2-year note that dropped more than 26 percent.

The wide spread between the 2-year note and the 10-year note is around 10 basis points which is the flattest since 2007. Bond prices move in the opposite direction of yields, and the spread between the 3-year note and the 5-year note have already inverted. 1-year note and 10-year isn`t near at all.

In a normal situation, the short-term bills yields less than the long-term bills, which means that investors expect a lower return when their money is tied up for a shorter period like 1,2 or 3-year notes. Investors require a higher yield to give them more return on a long-term investment.

If investors have little confidence in the near-term economy, the yield curve inverts. Investors demand more yield for a short-term investment than for a long-term one. They belive the near-term as riskier than the long-term.

In a situation like that, investors would prefer to buy long-term bonds and tie up their money for years in the long run even though they receive lower yields. The reason why investors do that is because they believe the economy is getting worse in the near-term.

An inverted yield curve is most worrying when it occurs with Treasury yields and that`s when yields on short-term Treasury bills, notes and bonds are higher than long-term yields. During healthy economic growth, the yield on a 30-year bond will be three pints higher than the yield on a three-month bill.

The reason why the short-term bill decline and makes an inverted yield curve is that investors believe they will make more by holding onto a longer-term bill than a short one. They think they need to reinvest in a short-term bill a few months any way.

If investors think that the economy is slowing and the recession is coming, they expect the value of the short-term bills to plunge in a short period of time. When the economy slows down, the FED lowers the Fed funds rate, and the short-term Treasury bill yields track the fed funds rate.

It is when the demand for long-term bills goes up that the demand for the short-terms bills goes down. Then the yield for short-terms bills goes up while the yield for the long-term bills goes down, and that`s whats happening now.

For example,when the yield on short-term Treasury’s rises higher than the yield on long-term bonds is where the yield curve inverts. The Treasury yield curve inverted for the first time since the recession. The 3-year note was higher than the 5-year note. Investors are saying that the economy is better in five years than in three years.

President Trump is disappointed when it comes to the FED`s descision to raise the rates which is going to raise to about 3,5 percent in 2020. Mr Trump and investors are worried it could trigger an economic slowdown in three years if the rates is too high.

This small inversion is probably temporary, but if it continues to grow bigger, we can be thrown into a recession. The current fed funds rate determines the outlook of the U.S economy, and people should never ignore an inverted yield curve. Just take a look at the history.

In June 2007, the yield curve was on the brink and went back and forth, between inverted and flat yield curve. The Fed reacted too late and lowered the fed funds rate ten times until it reached zero by the end of 2008.

The yield curve was no longer inverted but it was too late, and we know the rest of the story; The economy went into the worst recession since the Great Depression. This is just a reminder.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

 

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by | November 21, 2014 · 8:40 pm

High-yield bonds vs the stock market

High-yield bonds became very popular in the 1980`s and is better known as junk bonds, and that is an interesting investment which is widely used for corporate takeovers. It became popular because high-yield bonds outperformed traditional bonds on average.

30 years earlier (1950`s), high-yield bonds were fallen angels. Companies that had issued bonds when they were healthy was falling on hard times, and high-yield investors were buying bonds in turnarounds.

High-yield bonds were financed unproven businesses in the 1980`s, and was issued for speculation, and now those bonds are issued by highly leveraged companies. High-yield bonds on the market today is with a high degree of variety, and they trend with the stock market, but can act like bonds other times.

To show this, I have printed out iShares iBoxx $ High Yield Corporate Bond (HYG) with SPDR S&P 500 (SPY).

Chart

The Yield line is inverted. If yields on corporate bonds rise, then stock prices will fall, and in times when money leaves corporate bonds, it can flight to safety, which sometimes could be Treasuries. That money would also leave stocks. That means stocks can go up in periods of flat or rising yields. The key to this anomaly is risk.

This has happened before. During periods of rising risk appetite among investors. We saw it in 1998, the dot-com boom and during the subprime boom. Two of them were the building of bubbles, but all of them correlated with times when the investors hunger for risk rose.

It happens because money leaves bonds during periods of risk appetite and goes into stocks, which means stocks don`t fall when corporate bonds yields rise. The stock market is booming because investors aren`t afraid to take reasonable risks. The money flows into stocks, not Treasuries. Yields are 50% greater compared to 10-year Treasuries.

HYG is not acting like stocks but it`s not acting like a bond investment either. SPY is moving higher while HYG is declining. It was a correlation before 2011, but after that it all changed. The above should be on every investors mind. Many investors said the rally in junk-rated bonds is in a bubble or close to one, and HYG ETF and the SPX should be in the forefront of Equity Traders minds.

Some say that high-yield isn`t an good opportunity anymore. Watch out for this chart and look out for RS of HYG to SPY for signals of a market top. Look out for HYG outperformance. Weakness in equities is often preceded by a loss of momentum in credit markets. HYG need to stabilize. If not, equities will tumble. The disconnect between stocks and bonds probably means more pain ahead. Will the junk bond bubble burst, or stocks tumble? I`m exited about the end of the trading year. China cut the rate today, and the U.S markets are all up.

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | October 24, 2013 · 1:54 pm

Risk and reward

The U.S market fell yesterday and it was all red. Today the Asian market i up. Nikkei is up from a two week low. Gold is trading at $1334,50. Netflix is down -15% from it`s all time high. Are you willing to buy stocks in Netflix now? Or blue chips? What about risky small-cap stocks? Bonds?

Investing carries a certain amount of risk, but how much risk are you willing to take? What are you willing to pay for a stock? How much can you afford to lose? You have to look for risk and reward.

When you invest, you can get some pain, but you can also get some gain. That`s why you have to weigh the reward against the risk when you are investing. Understanding risk and reward is the key in investing in stocks and other financial papers.

You have all heard the words: “the higher the risk, the higher the potential return”. It`s very important to understand you own comfort level when you are investing. Then you will clearly understand the relationship between risk and reward.

Bank certificates of deposit (CDs) with a fedrally insured bank are also very secure. But the price for this safety is a very very low return on you investment. You can end up earning nothing when you calculate taxes on your gain and inflation.

To invest you need to think about the amount you are willing to put into the market. Before you invest, you must decide when you are willing to sell. How much rate of return or growth do you accept? And don`t forget fees, inflation and tax and the value of the dollar.

All those thing goes in different directions. That`s why many investors like to put different eggs in different baskets. Investors are diversifying their portfolios, and invest in different papers with various degree of risk. The goal is to take profit from a rising market, and to protect themself against dramatic losses in a down market.

New today: Unemployment Claims at 8:30am, Flash Manufacturing PMI at 9:00am, New Home Sales at 10:00am.

risky.behavior

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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