Partnered With:

SignalPlus Macro Research Report: DeFi encounters a storm, Curve faces liquidation risk due to hacker attack.

Read this article in 10 Minutes

In terms of cryptocurrency, the prices of major coins have not fluctuated significantly.

Original Title: "SignalPlus Macro Research Report Special Edition: A Trillion Here, a Trillion There..."

Original Source: SignalPlus Chinese

Yesterday, the market suddenly realized that the rapid growth of the estimated loan amount by the Ministry of Finance means that there will be a large number (really a lot) of bonds for sale. The 30-year bond yield rose by 9 basis points yesterday, no matter how you look at it, the overall US bond yield is currently at a high point in 2023; perhaps some people will attribute the sharp decline in the bond market to Fitch's untimely rating downgrade, or ADP's employment data is too good (July employment increased by 324,000, higher than the expected 190,000; after strong addition of 455,000 last month, the service industry also increased by 303,000), but we are more concerned that in the case of expected increase in supply, this may be the beginning of the long-term actual yield re-pricing.

In short, the Ministry of Finance announced a significant increase in estimated quarterly net borrowing (about $1 trillion in the fourth quarter), and the scale of bond auctions next week will increase by more than $7 billion. "The scale of Treasury bill auctions will further moderately increase," and the worst is yet to come, because according to current borrowing forecasts, the scale of 5-year bond auctions will soar from about $43 billion per month last month to $70 billion per month before April 2024 at the earliest, which is a very significant increase in bond supply even by US fixed income standards.

In addition, due to the cash flow tension experienced by the Ministry of Finance during the recent debt ceiling battle, they have announced that they will maintain a higher proportion of cash position in the future to better manage liquidity, and will continue to maximize their borrowing needs through more flexible short-term treasury bills. However, compared to longer-term bonds, the Ministry of Finance currently maintains a 20% internal limit on treasury bill financing, and this limit has been reached, so additional funding needs will have to be met through the issuance of longer-term bonds.

However, as we have mentioned many times before, there is absolutely no solvency or liquidity issue in the US market. This is only a consideration for asset reallocation. Objectively speaking, even if the interest rates are adjusted to the current high level, the proportion of US government interest payments to GDP is only 2%, which is close to the historical low point since 1940. Even if the interest rates double from the current level, this ratio will still be below 5%. From the perspective of solvency, there is almost nothing to worry about.

What is particularly worrying is that even if we assume full reinvestment of fixed income, the quarterly issuance of $1 trillion in bonds is still a large sum of money, especially considering that monetary tightening is still ongoing and may accelerate in the remaining time of this year. In addition, instead of worrying about the US federal credit situation, we may need to worry more about the US bond market. The average spread of investment-grade bonds has fallen to a cyclical low, and the flood of government bond supply and rating downgrades is likely to further negatively impact spreads, especially given the current tight spread situation.

The expansion of actual interest rates in the United States has exacerbated the differences between different assets and stocks. This is reflected in the widening gap between the forward P/E ratio of SPX and actual interest rates. However, the US stock market has finally experienced a decline, with the SPX index closing down 1.4% yesterday, mainly due to the sharp rise in bond yields leading to weakness in technology and consumer stocks. However, the larger price movements in the future may depend on the performance of Friday's non-farm payroll data and the financial results of Apple, which will be announced after today's closing.

In terms of cryptocurrency, the prices of major currencies have not fluctuated much, with BTC and ETH at price levels of around 29k and 1.9k respectively. However, there is a big storm brewing in the DeFi sector, related to the recent Curve (CRV) hack and concerns about margin cascading liquidation. In addition, after celebrating Judge Torres' favorable ruling in the XRP case, the cryptocurrency suffered a setback yesterday. In the case against Terraform Labs (Luna), Judge Rakoff made a ruling favorable to the SEC, and the Terra-USD (TUSD) stablecoin may be considered a security when sold to retail investors.

The regulatory stance seems still unclear, and it appears that we are back to square one. The stock price of Coinbase has also been affected, dropping by 9.5%. As for the question of whether it is a security or not, it seems that the court will have to spend more time debating to reach a consensus.