The Bond Blow Out, Stocks Dragging Bitcoin & Crypto Down While USD Strengthens

Stock markets are taking a hit all around the world as the US Treasury yields continue to soar.

Nearly 3% were knocked from emerging market stocks on Friday; setting the benchmark index for its biggest weekly fall since March 2020.

Yields on US 10-year bonds slipped slightly on Friday, but they continue to hover near one-year highs after surging to 1.55%, while yields on US 30-year bonds went as high as 2.341%, last seen in January 2020.

According to Barclays, the rise in US Treasury and real yields are as benign for EM assets as they reflect optimism about growth and the effects of a larger U.S. fiscal stimulus.

Atlanta Fed President Raphael Bostic isn’t concerned about rising yield either and said the central bank doesn't need to do anything to address this uptick. Bostic said,

“Right now, I am not worried about that. … We will keep an eye out. … I am not expecting that we will need to respond at this point in terms of our policy.”

Meanwhile, the European Central Bank is monitoring the recent surge in government bond borrowing costs, said ECB chief economist Philip Lane on Friday, adding they will not try to control the yield curve.

“What we’re seeing now is not a significant and persistent change in the path of inflation,” Lane said, arguing that price growth was still too low and required ECB stimulus.

Dollar Enjoying the Uptick in Yields

On the back of strengthened yields, the US dollar touched a fresh six-month high versus the yen. The dollar index also edged higher above 90.


Source: Bloomberg

Both dollar and yen are traditional haven currencies, but when US yields rise, the yen tends to decline, and the dollar tends to rise.

“The market has gotten more and more confident about how strong the global economy could look in the second half of the year, and implied in that is increasing skepticism that central banks will be able to honor the promises they’ve given that rates are not going anywhere,” said Ray Attrill, head of forex strategy at National Australia Bank in Sydney.

“The decline in bonds spooked equities,” leading to “classic U.S. dollar safe-haven support,” he said.

Bonds yields are supported by the expectation for massive fiscal stimulus amid Federal Reserve's ultra-loose monetary policy. This, according to Westpac strategists, is a “lethal phase for risky assets.”

Risky Assets Take a Beating

S&P 500 has now dropped more than 2.5% and Dow over 1.8% from their Wednesday’s highs. Tech-heavy Nasdaq has been sliding for two weeks now, down 7% since hitting its ATH on Feb. 12 at 14,095.47.

Bullion also took a beating, with spot gold prices falling to $1,755 an ounce, last seen in late June 2020.

Stocks are also dragging the crypto market down with them. After the sell-off on Monday and Tuesday, Bitcoin recovered to barely $51,000 but only to hit a new low today to $44,000, down 24.5% from Sunday’s all-time high of $58,300.

As of writing, BTC/USD is still hovering below $47k at $46,500 (-8.55%).

According to trader and economist Alex Kruger, the global market’s script since late March 2020 has been the Fed keep short rates at zero, real rates (inflation-adjusted) turning negative, which then cause asset prices to pump and reflation kicks in, Fed caps long yields ensuring negative real rates, and prices keep pumping.

We are currently waiting for the US central bank to cap long yields and ensure negative real rates, he added.

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