Bond Market Signals Potential Global Recession

06.12.22 12:23 AM By Stormrake

As we continue to trade our way through a brutal 2022, the US bond market shows no remorse and provides the strongest signal that a deep global recession is imminent. Today we dissect how real this signal can be and what risks are associated with its confirmation.

The information contained here is for general information only. It should not be taken as constituting financial advice. Stormrake is not a financial adviser. You should consider seeking independent financial advice prior to making any personal investments.

Yield Curve Inversion

Interactive chart: click on image for higher resolution

US bond yields give us a clear picture of what large hedge funds, sovereign wealth funds and global money managers think of risk across different time horizons. A normal yield curve for any bond market would be the longest dated bonds, so think 10 year, 20 year and 30 year bonds would pay the highest yield, as you assume the longest duration risk and are locking up your funds for a significant period of time. To cover that risk premium and duration, they pay higher yields whilst shorter dated bonds, think 1 year and 2 year pay a lower yield as your duration risk is much shorter.

What we are seeing now is called yield curve inversion, where shorter dated bonds are paying a much higher yield than the long dated bonds, this is because bond investors see a much higher risk in the next two years than in the future. So the risk premium for having your capital locked up during a global recession cranks short dated bond yields way up.

Now with all of this in mind, we are now witnessing the deepest US bond yield curve inversion in over 30 years. This shows how desperate bond investors are to exit their bonds, as they pay huge coupons to jump out of short dated bonds in fear of getting caught in a recession. We don't wish to be alarmist but it's important to note that these risks are real and we need to keep them in mind when heading into a new calendar year.

Bitcoin Exchange Supply Dries Up

Due to the collapse of FTX, the jarring reality of counter-party risk has hit the entire crypto industry like a sack of bricks. This has led to a significant run on exchanges, as crypto traders and investors rush to withdraw their Bitcoin balances from exchanges into the safety of their self-custody. With this frenetic rush to withdraw, Bitcoin balance on exchanges have hit multi-year lows, combine this fact with an increasingly illiquid market as many market makers have bit the dust in 2022, it sets up a supply squeeze.

As there is less available Bitcoin on exchanges and the shocking reality of Paper Bitcoin now exposed, we can finally see some real price discovery on exchanges, as market structures are now setup in an eerily similar fashion to the 2017/2018 period.

BTC/USD key levels

Bitcoin has now well and truly reclaimed our key level of $16,500 USD. BTC now has to do battle with $17,189, which was the resistance level we highlighted in our previous Morning Note. It managed to peak above this pocket but was brought back down with a weak US stock market session. If we reclaim and close above $17,189 the next major level of resistance comes in at $18,217, which is a tidy lift of 7% from current levels. To the downside, if we lose $16,500 then the next major level of support comes in at $15,588.

ETH/USD key levels

Ethereum has a slightly more bullish market structure and technical chart as compared to Bitcoin. Should ETH manage to finally close above $1,300 USD on the daily timeframe, the local resistance level comes in at $1,386. Should it clear $1,386 the major resistance level comes in at $1,472 where we expect the market to take a pause. If ETH fails to reclaim $1,300 on the daily, then it becomes clear resistance and we look for a move towards the previous key level of $1,190. Should $1,190 fail to hold, expect a sharp move towards $1,130 before support manages to kick in.

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The information in this newsletter is general only. It should not be taken as constituting professional advice from the author - Stormrake PTY LTD.

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