U.S. Treasury yields hit an 11-year high as investors dumped risk assets, U.S. stocks and crypto markets were "double-killed"

Wall Street's worst week since June just ended, with U.S. stock futures opening sharply lower again this week. The 10-year U.S. Treasury yield hit its highest level in 11 years early Monday, and risk assets including cryptocurrencies saw panic selling again as traders expected the Federal Reserve to take further action amid persistently high inflation.

The yield of US Treasury bonds, which are regarded as risk-free bonds by the market, continued to rise. Market data showed that the yield of the benchmark 10-year US Treasury bond rose by 6 basis points to 3.518%, reaching the highest level since April 2011. The yield of the 2-year Treasury bond rose by 8 basis points to 3.94%, the highest level since 2007 (Note: the yield moves in the opposite direction to the price, and 1 basis point is equivalent to 0.01%).

Why are U.S. Treasury yields important?

There are many reasons why investors track U.S. Treasury yields (or interest rates).

Treasury yields (or interest rates) are paid by the U.S. government as interest for borrowing money by selling bonds. Treasury bonds are seen as a safer investment relative to stocks because they are backed by the U.S. government. The 10-year Treasury yield is closely watched as an indicator of broader investor confidence. Bond prices and yields move in opposite directions -- falling prices increase yields, while rising prices reduce yields.

The 10-year Treasury yield is used as a proxy for mortgage rates, which is also seen as a sign of investor sentiment toward the economy. In theory, given that long-term bond yields are the risk-free rate, higher bond yields are bad for stocks, and vice versa.

Risk assets become less attractive

Yields across the Treasury market are trading at multi-year highs after several rate hikes by the Federal Reserve. Fewer than 16% of S&P 500 stocks offer dividend yields higher than the two-year Treasury note, which yields nearly 4%, and fewer than 20% offer dividend yields higher than the 10-year Treasury note, according to Strategas.

This may mean that high-tech stocks or growth stocks, as well as cryptocurrencies represented by Bitcoin, are no longer popular among investors.

The crypto market continues to fall. Bitpush terminal data shows that the price of Bitcoin has failed to re-enter the psychological support area of ​​$20,000, and fell to a three-month low below $19,000 in the past 24 hours. The enthusiasm for the Ethereum merger narrative has subsided. As of press time, BTC/USD fell 3.5% to around $19,023, while ETH fell 4% to around $1,329.

U.S. stocks have fallen in four of the past five weeks, with the Dow Jones Industrial Average suffering one of its worst corrections of the year last week. The blue-chip index is down 15% in 2022, while the S&P 500 is down 19%.

Katie Nixon, chief investment officer at Northern Trust Wealth Management, told the Wall Street Journal: "Many investors are taking risks in the stock market because there are no returns anywhere else. Now is the time for people to think carefully, 'Is the risk really necessary?'"

Crypto lending yields lower than US Treasury bonds

Compared with U.S. Treasuries, the yields of crypto lending products also pale in comparison.

Crypto lending is the process of depositing cryptocurrency on a platform where it is loaned out to borrowers in exchange for regular interest payments. Payments are made in the form of cryptocurrency and are usually deposited on a daily, weekly or monthly basis with compound interest.

For example, on cryptocurrency exchange Gemini, after a user opens an account, “they can purchase any amount of cryptocurrency and instantly transfer it to Gemini Earn to start earning interest on their holdings.”

As of September 18, 2022, a hypothetical deposit of $10,000 worth of Bitcoin would only earn an APY of 2.75% (as shown in the figure below), while the yield on the US 3-month Treasury bill was 3.136% as of September 19.

Jaime Baeza, CEO of ANB Investments, a hedge fund focused on cryptocurrencies, said in an interview with Bloomberg: "Two years ago, the interest rate on cryptocurrencies was at least 10%, and market interest rates were either negative or close to zero. Now the situation is almost the opposite, as the yields on cryptocurrencies have plummeted and central banks are raising interest rates."

“The yields on cryptocurrencies that institutions typically seek are already lower than the three-month interest the U.S. government pays for borrowing, giving hedge funds and family offices that have flocked to digital assets less reason to keep investing,” the Bloomberg report reads.

Real yields may rise further

A report released by Goldman Sachs over the weekend showed that real bond yields could rise further in the coming months. Goldman Sachs predicts that the 10-year US Treasury Inflation-Protected Securities (TIPS), which adjust regularly to compensate for increases in the consumer price index, could rise to 1.25% by the end of the year and eventually peak between 1.25% and 1.5%. According to TradingView data, as of press time, the real yield on TIPS is 1.02%, the highest level since November 2018.

Historically, Bitcoin has moved in the opposite direction to TIPS real yields. The 90-day correlation between the two reached a record high of -0.95 at the end of June. As Ethereum has combined to hedge some of the macro bearish factors, the negative correlation has weakened to -0.65 in recent weeks.

However, with the Federal Reserve’s rate hikes looming, Bitcoin and the broader crypto market’s negative correlation with real yields could strengthen again.

“The macroeconomic environment remains tightly controlling the direction of financial assets, including Bitcoin,” analysts at Nydig, an investment firm focused on Bitcoin, wrote in a report.

Brian Cubellis, institutional research analyst at Coinbase, noted in his weekly market update: “Aggressive selling in BTC-USD confirms a bear market after testing the 50-day moving average... If we decisively break above $17,400, the next support level is $14,800.”

The Fed's two-day meeting will begin on Tuesday local time, and most market participants expect the central bank to raise interest rates by another 75 basis points. Some analysts, including Nomura Securities, even predict that the Fed may raise interest rates by one percentage point, or 100 basis points.

“The Fed statement will be everything, and we need a light at the end of the tunnel,” said Louis Navellier, chief investment officer at Navellier & Associates.