Understanding the Simultaneous Decline in EVERYTHING!
1. The Influence of U.S. Treasury Yields and Interest Rates
The U.S. 10-year Treasury bond yield is a major benchmark in global finance. When yields rise, it signifies that bonds are becoming more attractive relative to riskier assets. Rising yields typically occur when:
Investor Demand Shifts: Investors move from risky assets (like equities or crypto) to safer, higher-yielding government bonds.
Inflation Expectations: Higher inflation expectations often lead investors to demand higher yields, which in turn increases borrowing costs.
Cause and Effect:
When Treasury yields increase, the opportunity cost of holding lower-yielding assets rises. This makes stocks, precious metals like gold, and speculative assets like cryptocurrencies less attractive. Even gold, typically seen as a safe haven, can lose its charm if fixed-income assets provide competitive returns with significantly lower risk.
2. M2 Money Supply Dynamics
The M2 money supply measures the total liquidity available in the economy, including cash, checking deposits, and easily convertible near-money assets. Changes in M2 can impact asset prices in several ways:
Expanding M2: More liquidity in the market initially can boost asset prices. However, if this expansion leads to rising inflation, it may eventually trigger higher interest rates and bond yields.
Contraction or Slowing Growth in M2: A tightening in liquidity can reduce the flow of money into various asset classes. This dampens overall market sentiment and makes riskier assets less attractive.
Cause and Effect:
If M2 growth slows or contracts, there is less capital to chase after higher returns in equities and crypto. At the same time, if there is an expectation of tightening monetary policy, investors recalibrate risk expectations, which leads to a broader sell-off across multiple asset classes.
3. Investor Sentiment and Risk-Off Behavior
In periods where both Treasury yields are rising and the money supply signals less liquidity, the overall investor sentiment often shifts toward a "risk-off" stance. This means:
Safe-Haven Demand: Investors move into safe assets like government bonds, which drives up bond prices and yields while pulling money out of riskier assets such as stocks, gold, and cryptocurrencies.
Correlation Effect: As riskier assets are sold off, their prices fall in tandem. Therefore, even if gold typically acts as a counterweight to stocks, in a severe risk-off environment, all asset classes might decline.
Cause and Effect:
With a risk-off sentiment dominating the market, traditional safe havens (like gold) and growth-oriented assets (stocks and crypto) can experience simultaneous declines. Rising yields encourage a rotation away from these riskier positions, which reinforces the downward trend across multiple markets.
4. Historical Context: The Trump Era and Beyond
During the Trump administration, we observed episodes where Treasury bond prices surged significantly (e.g., a 10% surge) as investors sought refuge during periods of political and economic uncertainty. Eventually, as market sentiment shifted, yields rose, and this led to higher borrowing costs. The resulting effect was a broad-based retreat in many asset classes.
Example: In those periods, as yields climbed to around 4%, investor appetite for risk diminished. The market corrected across equities, precious metals, and cryptocurrencies, with all asset classes experiencing pressure concurrently.
Cause and Effect:
In the current climate, if similar dynamics are at work—namely, rising yields accompanied by tightening M2 growth—then we might see a similar pattern: gold, the S&P 500, and crypto all experience declines together because investor risk appetite is sharply reduced.
Conclusion
The simultaneous decline in gold, the S&P 500, and cryptocurrencies can primarily be attributed to rising U.S. Treasury yields and tightening M2 money supply. As yields rise:
The relative attractiveness of low-risk government bonds improves, encouraging a shift in investment away from riskier assets.
Increased yields raise borrowing costs, which in turn dampens economic growth and investor sentiment.
Slowing liquidity (as measured by M2) further restricts the available capital chasing after higher returns.
This confluence of factors leads to a widespread "risk-off" environment where even traditional safe havens like gold may fall as the entire market adjusts to a higher interest rate and lower liquidity backdrop. Investors thus move across asset classes in a coordinated fashion, leading to declines in gold, equities, and crypto alike.
Understanding this cause-and-effect relationship is crucial for professional traders who rely on disciplined strategies. With a clear view of the broader economic signals, you can navigate these shifts with precision—helping you not only to avoid costly mistakes but also to capitalize on high-probability opportunities that emerge during these market transitions.
1. The Influence of U.S. Treasury Yields and Interest Rates
The U.S. 10-year Treasury bond yield is a major benchmark in global finance. When yields rise, it signifies that bonds are becoming more attractive relative to riskier assets. Rising yields typically occur when:
Investor Demand Shifts: Investors move from risky assets (like equities or crypto) to safer, higher-yielding government bonds.
Inflation Expectations: Higher inflation expectations often lead investors to demand higher yields, which in turn increases borrowing costs.
Cause and Effect:
When Treasury yields increase, the opportunity cost of holding lower-yielding assets rises. This makes stocks, precious metals like gold, and speculative assets like cryptocurrencies less attractive. Even gold, typically seen as a safe haven, can lose its charm if fixed-income assets provide competitive returns with significantly lower risk.
2. M2 Money Supply Dynamics
The M2 money supply measures the total liquidity available in the economy, including cash, checking deposits, and easily convertible near-money assets. Changes in M2 can impact asset prices in several ways:
Expanding M2: More liquidity in the market initially can boost asset prices. However, if this expansion leads to rising inflation, it may eventually trigger higher interest rates and bond yields.
Contraction or Slowing Growth in M2: A tightening in liquidity can reduce the flow of money into various asset classes. This dampens overall market sentiment and makes riskier assets less attractive.
Cause and Effect:
If M2 growth slows or contracts, there is less capital to chase after higher returns in equities and crypto. At the same time, if there is an expectation of tightening monetary policy, investors recalibrate risk expectations, which leads to a broader sell-off across multiple asset classes.
3. Investor Sentiment and Risk-Off Behavior
In periods where both Treasury yields are rising and the money supply signals less liquidity, the overall investor sentiment often shifts toward a "risk-off" stance. This means:
Safe-Haven Demand: Investors move into safe assets like government bonds, which drives up bond prices and yields while pulling money out of riskier assets such as stocks, gold, and cryptocurrencies.
Correlation Effect: As riskier assets are sold off, their prices fall in tandem. Therefore, even if gold typically acts as a counterweight to stocks, in a severe risk-off environment, all asset classes might decline.
Cause and Effect:
With a risk-off sentiment dominating the market, traditional safe havens (like gold) and growth-oriented assets (stocks and crypto) can experience simultaneous declines. Rising yields encourage a rotation away from these riskier positions, which reinforces the downward trend across multiple markets.
4. Historical Context: The Trump Era and Beyond
During the Trump administration, we observed episodes where Treasury bond prices surged significantly (e.g., a 10% surge) as investors sought refuge during periods of political and economic uncertainty. Eventually, as market sentiment shifted, yields rose, and this led to higher borrowing costs. The resulting effect was a broad-based retreat in many asset classes.
Example: In those periods, as yields climbed to around 4%, investor appetite for risk diminished. The market corrected across equities, precious metals, and cryptocurrencies, with all asset classes experiencing pressure concurrently.
Cause and Effect:
In the current climate, if similar dynamics are at work—namely, rising yields accompanied by tightening M2 growth—then we might see a similar pattern: gold, the S&P 500, and crypto all experience declines together because investor risk appetite is sharply reduced.
Conclusion
The simultaneous decline in gold, the S&P 500, and cryptocurrencies can primarily be attributed to rising U.S. Treasury yields and tightening M2 money supply. As yields rise:
The relative attractiveness of low-risk government bonds improves, encouraging a shift in investment away from riskier assets.
Increased yields raise borrowing costs, which in turn dampens economic growth and investor sentiment.
Slowing liquidity (as measured by M2) further restricts the available capital chasing after higher returns.
This confluence of factors leads to a widespread "risk-off" environment where even traditional safe havens like gold may fall as the entire market adjusts to a higher interest rate and lower liquidity backdrop. Investors thus move across asset classes in a coordinated fashion, leading to declines in gold, equities, and crypto alike.
Understanding this cause-and-effect relationship is crucial for professional traders who rely on disciplined strategies. With a clear view of the broader economic signals, you can navigate these shifts with precision—helping you not only to avoid costly mistakes but also to capitalize on high-probability opportunities that emerge during these market transitions.
Professional Day Trader
Microstructure Practicioner
t.me/umuttrades
kick.com/umuttrades live everyday.
Microstructure Practicioner
t.me/umuttrades
kick.com/umuttrades live everyday.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Professional Day Trader
Microstructure Practicioner
t.me/umuttrades
kick.com/umuttrades live everyday.
Microstructure Practicioner
t.me/umuttrades
kick.com/umuttrades live everyday.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.