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  • Writer's pictureĐu Đủ

Why are people freaking out about the bond market?

Du Du has a conversation with Carrot Man about the bond market, bearish sentiment and what it means.


Carrot Man: @DuDu ELI5 what this is all about?


Du Du: A few key points you've got to understand:

1. When bonds crash, i.e., people sell them, the yield goes up. For example, if you had a $100 bond that pays $5, that's a 5% yield.

But if it crashed to $50, the person who buys that bond still gets the $5 interest payment, which means they are getting a 10% yield.

2. When Treasury bond yields are high, you have less reason to buy stocks. At the end of the day, you buy the S&P 500 because you expect to get gains, right? You take risks for gains, but Treasury bonds offer guaranteed returns.

So if the bond yield is 10%, you won't bother buying some risky stock unless it beats 10% returns. The same goes for real estate, etc.

3. This is what we mean by the yield curve. The current market price at each "vintage" of the Treasury bond differs based on market expectations of the future yield.

4. The reason people are concerned, is that up to now even though the Fed said no more printergoesbrrr many think that Jerome Powell and the FOMC gang are a bunch of ********, and so people are all like "buy the ******* dip" like the last 30 years.

So despite the Fed increasing its cash rate, the long end of the curve (10 years to 30 years) still reflects low-rate expectations because the market thought the Fed was an awkward teenager going through a "phase". However, recently, the long end of the curve is now reflecting higher rates (market is starting to think the Fed might be for real), which implies a potential meltdown in risk assets because bonds are becoming more attractive than stocks and real estate.

Remember when bonds "crash," they become more attractive. This is why my VOO (Vanguard S&P 500 ETF) got affected.

Carrot Man: Ahh, I see. So it's essentially a reflection of hawkish market sentiment?

Du Du: Yes, hawkish on interest rates, that is. And because low rates have been the reality for an entire generation of millennials, a lot of **** is based around it. Things could break if we really have 5% rates at the long end (expecting long-term high rates like now).

Carrot Man: Ok, I see. At the beginning of the year, many believed Jerome can't hold out much longer before printing, but now it seems they're serious.

Du Du: Yes, personally, I still don't buy it, but the market is starting to reflect it. The Fed's credit tap has been on since 2008, even before that (possibly since the Asian financial crisis).

There's concern about a recession, but asset prices haven't crashed yet. People don't fully trust the Fed.

Carrot Man: It feels like we're on the edge of either a depression or hyperinflation.

Du Du: I'd bet we're in a recession already. Asset prices haven't crashed because no one believes the Fed.

Carrot Man: Boom or bust, the fiat mining continues… Sad ****.

Got no reason to believe them now.

Du Du: Hard to say. I mean, the related discussion right now is inflation expectations. Some people are saying inflation is lagging in being reflected but already put out because we're fully in a recession. Other people say it'll kick off again. Usually, commodity prices can indicate this since commodities like oil and energy are big drivers of CPI.




And in Chinese below for fun


**Carrot Man (胡萝卜人):** @DuDu 用简单的语言解释一下这是什么意思?


**Du Du (杜杜):** 你需要理解几个关键点:

1. 当债券崩溃,也就是人们卖出它们时,收益率会上升。例如,如果你持有一张面值100美元的债券,每年支付5美元的利息,那就是5%的收益率。但如果它崩溃到50美元,购买该债券的人仍然会获得5美元的利息支付,这意味着他们获得了10%的收益率。


2. 当国债收益率高时,你购买股票的理由就少了。归根结底,你购买标准普尔500指数是因为你希望获得回报,对吧?你愿意冒险是为了获得收益,但国债提供的是保证回报。因此,如果债券收益率为10%,你就不会去购买一些风险较高的股票,除非股票的回报率超过10%。同样适用于房地产等其他投资。


3. 这就是我们所说的收益率曲线。每种“年份”的国债在市场对未来收益预期不同的情况下具有不同的市场价格。


4. 人们感到担忧的原因是,尽管美联储说不再印钱了,但很多人认为杰罗姆·鲍威尔和美联储的团队是一群*******,所以人们一直像过去30年一样“买这个*******的低谷”。尽管美联储提高了现金利率,但长期收益率曲线(10年到30年)仍然反映出市场对低利率的预期,因为市场认为美联储只是在经历“青少年时期的阶段”。然而,最近,长期收益率曲线正在反映出更高的利率(市场开始认为美联储可能是认真的),这暗示了潜在的风险资产崩溃,因为债券变得比股票和房地产更具吸引力。


**Carrot Man (胡萝卜人):** 啊,我明白了。所以这本质上是对鹰派市场情绪的反映?


**Du Du (杜杜):** 是的,鹰派对利率的看法。因为低利率已经是千禧一代整个一代人的现实,很多*******都是基于它建立的。如果长期利率到达5%(预期长期高利率),一切可能都会崩溃。


**Carrot Man (胡萝卜人):** 好的,我明白了。年初的时候,很多人认为杰罗姆不能再坚持下去,必须要开始印钞了,但现在看起来他们很认真。


**Du Du (杜杜):** 是的,个人而言,我还是不太相信,但市场开始反映出这一点。美联储的信贷龙头自2008年以来一直打开,甚至在那之前(可能是自亚洲金融危机以来)。


**Du Du (杜杜):** 人们担心出现经济衰退的迹象,但资产价格尚未崩溃。人们对美联储没有完全的信任。


**Carrot Man (胡萝卜人):** 感觉我们要么面临萧条,要么面临恶性通货膨胀。


**Du Du (杜杜):** 我敢打赌我们已经处于经济衰退中了。资产价格之所以没有崩溃,是因为没有人相信美联储。


**Carrot Man (胡萝卜人):** 不管是繁荣还是衰退,货币挖掘都在继续...真是可悲。


**Carrot Man (胡萝卜人):** 现在没有理由相信他们了。


**Du Du (杜杜):** 很难说。我的意思是,目前相关的讨论是关于通货膨胀预期。有些人说通货膨胀滞后于反映,但已经爆发了,因为我们已经完全处于经济衰退中。其他人则认为它会再次加剧。通常,大宗商品价格可以表明这一点,因为像石油和能源这样的大宗商品是消费者价格指数(CPI)的主要驱动因素之一。

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