The Fluctuations of the Crypto Market and the Potential Impact of the US Debt Crisis

This week, the crypto market has experienced significant fluctuations, with price trends showing an M-shaped pattern. As the inauguration date on January 20 approaches, the capital market has begun to weigh the opportunities and risks following Trump's election, marking the end of the emotionally driven market conditions of the past three months. Currently, it is necessary to extract the focal points of short-term market games from complex information to make rational judgments about market changes. This article will share observational logic from the perspective of a non-financial professional enthusiast, hoping to provide reference for readers.

Overall, high-growth risk assets, including the crypto market, may continue to face pressure in the short term. This is mainly due to the widening term premium in the U.S. Treasury market, leading to rising mid- to long-term interest rates, which adversely affects these assets. The fundamental cause of this situation is that the market is pricing in a potential debt crisis in the U.S.

Macroeconomic indicators remain strong, and inflation expectations have not significantly intensified.

When analyzing the factors behind the recent price weakness, it is necessary to examine several important macroeconomic indicators released last week. Firstly, data related to U.S. economic growth shows that both the ISM Manufacturing and Non-Manufacturing Purchasing Managers' Indexes have continued to rise. As leading indicators of economic growth, this suggests a relatively optimistic short-term economic outlook for the United States.

In terms of the job market, non-farm payroll data increased from 212,000 last month to 256,000, far exceeding expectations. The unemployment rate fell from 4.2% to 4.1%. JOLTS job vacancies surged to 809,000. The number of initial unemployment claims continued to decline, indicating that the job market performance in January is expected to remain strong. All these data suggest that the U.S. job market remains robust, and a soft landing for the economy is almost certain.

In terms of inflation, since the CPI data for December has not yet been released, we can observe the 1-year inflation expectations from the University of Michigan in the United States in advance. This indicator has risen compared to November, reaching 2.8%, but is below expectations and still within the reasonable range of 2-3%. From the changes in the yields of inflation-protected securities (TIPS), the market does not seem to be excessively panicking about inflation.

In summary, from a macro perspective, there are no significant issues with the U.S. economy. Next, we will explore the core reasons behind the decline in market value of high-growth companies.

U.S. Treasury long-term interest rates continue to rise, and the term premium increases reflect the market's concerns about the debt crisis.

The yield curve of U.S. Treasury bonds shows that long-term interest rates have continued to rise over the past week. Taking the 10-year Treasury bond as an example, the yield has increased by nearly 20 basis points, further exacerbating the bear steepening pattern of U.S. Treasury bonds. The rise in Treasury bond yields has a more negative impact on high-growth stocks compared to blue-chip or value stocks, primarily due to the following reasons:

1. Impact on high-growth companies:

   • Rise in financing costs
   • Valuation under pressure
   • Market preference shift
   • Capital expenditure is limited

2. Impact on stable enterprises:

   • The impact is relatively mild
   • Debt repayment pressure is increasing
   • Dividend attraction decreases
   • Inflation transmission effect

The rise in long-term bond yields has particularly impacted the market value of technology companies such as those in the encryption sector. The key is to identify the core reasons behind the increase in long-term bond yields in the context of interest rate cuts.

The nominal interest rate calculation model for government bonds is: I = r + π + RP

Among them, I is the nominal interest rate of government bonds, r is the real interest rate, π is the inflation expectation, and RP is the term premium. The real interest rate reflects the true return on bonds and is not affected by market risk preferences and risk compensation. Inflation expectations are usually observed through CPI or TIPS yields. The term premium reflects investors' demand for compensation for interest rate risk.

The previous analysis indicates that the current U.S. economy remains robust in the short term, with no significant rise in inflation expectations. Therefore, real interest rates and inflation expectations are not the main factors driving the increase in nominal interest rates; the issue focuses on the term premium.

The observation of term premium can utilize two indicators: the term premium level of U.S. Treasury bonds estimated by the ACM model and the Bank of America Merrill Lynch Option Volatility Estimate (MOVE index). Data shows that the term premium of 10-year Treasury bonds has clearly risen, which is the main factor driving the increase in U.S. Treasury yields. The MOVE index has recently shown little volatility, indicating that the market is not sensitive to the risk of fluctuations in short-term interest rates and has not made significant risk pricing in response to potential policy changes by the Federal Reserve.

The continuous rise in term premiums indicates that the market is concerned about the medium to long-term development of the U.S. economy, with the focus on the fiscal deficit issue. It can be confirmed that the current market is pricing in the potential debt crisis risk following Trump's inauguration.

In the near future, when observing political information and stakeholder perspectives, it is necessary to consider the direction of their impact on debt risk in order to more accurately assess the trends in the risk asset market. For example, Trump's claim of considering a national economic emergency in the U.S. may amplify concerns about the impact of the trade war, but the increase in tariff revenue has a positive effect on U.S. fiscal income, so the impact may not be very severe.

In contrast, the progress of the tax reduction bill and the government's spending cut plan are the most noteworthy focal points in the entire game. We will continue to monitor developments in these areas.