Though it is an often overlooked topic, yesterday’s Treasury bond auction has sparked a lot of interest amongst investors.
The latest issue was not well received, with an auction tail of 5.3 bps.
Markets were shaken by this, giving up the day’s gains and turning sharply negative. Or perhaps it was Fed Chair Jerome Powell’s unwavering hawkishness?
From a technical perspective, stocks in the S&P 500 Index (SP500) have found resistance at the 4400 level, which is a key area of volume.
But while stocks battle with correction territory, Bitcoin (BTC-USD) is making new year-to-date highs. Who is right? Or is this trend of crypto outperformance set to continue?
Not What The Market Ordered
Treasury auctions are generally a routine endeavor, but it becomes less routine when rates are this high, and Federal spending shows no signs of stopping.
Like with moat auctions, prices will be set by the prospective demand, and in this case, demand was assuredly weak.
This is clear when we look at the auction tail.
The auction tail is the difference between the “high yield” which is the yield received by bidders in the auction, and the “when-issued yield,” which is the price at which the bonds are initially offered.
An underbid auction will have a positive tail, while an overbid one will have a negative one.
Yesterday, the auction tail came in at 5.3 bps, a new record for the Treasury.
The Treasury and the Fed continue to lock horns, as Jerome remains unwavering in his hawkish resolve.
The Federal Open Market Committee is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance,” he said in his prepared speech.
Despite the many data points that suggest inflation could have been conquered, Jerome doesn’t even want to give a hint of relenting, as that could let the inflation genie back out.
Stocks feel the pain
As I talked about in my last article, stocks continue to hold a very strong negative correlation with yields.
Yields up, stocks down. There don’t seem to be two ways about it.
Stocks have actually reversed at the 4400 level. What I see now is a great opportunity for markets to retrace to the 200-day MA, fill the gap left last week, and form a base there from which to rally to new all-time highs. The 4250 level would be a great place to go for a long time, in my opinion.
Crypto Is The Only Winner
But while markets are battling with new lows, Crypto continues a relentless path to new highs.
With the $30,000 level convincingly behind us, there’s no real resistance until we reach the $40,000 level. But this rally smells different; Bitcoin is not alone this time:
TOTA3, which measures total crypto market cap minus Bitcoin and Ethereum (ETH), is breaking out to new highs.
It looks like sentiment is shifting in crypto. The ETF approval news may have something to do with it, but there might be more to it.
As I mentioned in my last BTC article, crypto is intricately tied with global liquidity.
The divergence we are seeing might be due to this. While Jerome continues to guide for a very hawkish, that’s not what the global trend is.
Central Banks are beginning to cut, and these expectations of the return in liquidity are being priced in by crypto.
But what about the U.S.?
The market is already pricing cuts in 2024. And while this will be good for markets long term, we know that selloffs tend to happen as the Fed cuts, normally in response to a recession.
At these levels, I think there’s a compelling argument to go long markets, and certainly crypto. However, we are seeing early signs of recession, with job numbers, for example, beginning to turn.
The market will take this as good news, until it isn’t, and a full-blown recession takes hold. We must remain very vigilant of how leading economic indicators come out in the following months. Until things take a turn, I do see the potential for one final leg up in risk assets.