Crypto market volatility: Risk pricing on the eve of Trump's inauguration

This week, the crypto market experienced significant fluctuations, with price trends showing an M-shaped pattern. As the official inauguration date on January 20 approaches, the capital market has begun to price in the opportunities and risks following Trump's election, marking the end of the emotionally driven market that has lasted for three months. Currently, it is necessary to extract the short-term gaming focus from the complex information in order to make rational judgments about market changes. This article will share observational logic from the perspective of non-financial enthusiasts, hoping to provide references for readers.

Overall, the prices of high-growth risk assets, including the crypto market, are likely to remain under pressure in the short term. The main reason is the widening term premium in the U.S. Treasury market, which has led to higher medium- to long-term interest rates, adversely affecting these assets. The fundamental reason for this phenomenon is that the market is pricing in the potential risk of a debt crisis in the U.S.

Macroeconomic indicators remain strong, inflation expectations have not significantly worsened

To analyze the factors behind the short-term price weakness, it is necessary to examine the important macroeconomic indicators released last week:

1. Economic growth data: The ISM Manufacturing and Non-Manufacturing Purchasing Managers' Indexes continue to rise, serving as leading indicators of economic growth, indicating a positive short-term outlook for the US economy.

2. Employment Market Performance:

   • Non-farm payrolls increased from 212,000 to 256,000, exceeding expectations.
   • The unemployment rate decreased from 4.2% to 4.1%
   • JOLTS job openings surged to 809,000
   • The number of first-time unemployment claims continues to decline

These data indicate that the US employment market remains strong, and an economic soft landing is nearly certain.

3. Inflation situation: The University of Michigan's 1-year inflation expectations have slightly risen to 2.8%, below expectations, and are still within the reasonable range of 2-3%. The changes in the yields of inflation-protected securities (TIPS) indicate that the market is not overly concerned about inflation.

In summary, from a macro perspective, the U.S. economy has not shown any significant problems. The next step is to identify the core reasons leading to the decline in the market value of high-growth companies.

Long-term interest rates on US Treasury bonds continue to rise, and the market is pricing in debt crisis risks

The yield curve of U.S. Treasuries shows that long-end rates continued to rise over the past week. Taking the 10-year Treasury as an example, the increase reached 20 basis points, further exacerbating the bear steepening pattern. The impact of rising Treasury yields on high-growth stocks is greater than on blue-chip or value stocks, mainly due to:

1. Impact on high-growth companies:

   • Rising financing costs
   • Valuation under pressure
   • Market preference shift
   • Capital expenditure is restricted

2. Impact on stable enterprises:

   • Relatively mild impact
   • Debt repayment pressure is rising
   • Decline in dividend attractiveness
   • Inflation transmission effect

The rise in long-term bond yields significantly impacts the market value of technology companies such as cryptocurrencies. The key lies in identifying the core reasons for the increase in long-term bond yields against the backdrop of interest rate cuts.

Nominal Interest Rate Calculation Model for Government Bonds: I = r + π + RP In this, I represents the nominal interest rate, r represents the real interest rate, π represents the inflation expectation, and RP represents the term premium.

The analysis above indicates that the U.S. economy is developing robustly 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 rise in nominal interest rates; the focus is on term premium.

The observation period premium can be measured using two indicators:

1. The term premium level of U.S. Treasury bonds estimated by the ACM model: Recently, the term premium of 10-year Treasury bonds has risen significantly, which is the main factor driving the increase in Treasury yields.

2. Merrill Lynch Option Volatility Estimate (MOVE Index): Recent volatility changes have been minimal, indicating that the market is not sensitive to short-term interest rate volatility risks and has not priced in significant risks regarding potential policy changes by the Federal Reserve.

The continuous rise in the term premium indicates that the market is concerned about the medium to long-term economic development in the United States, mainly focusing on the fiscal deficit issue.

Therefore, the market is currently pricing in the potential debt crisis risk in the United States after Trump's inauguration. In the coming period, attention should be paid to the impact of political information and the views of stakeholders on debt risk in order to assess the trends in the risk asset market.

Taking Trump’s announcement of considering a national economic emergency in the United States as an example, although it may exacerbate concerns about the trade war, the increase in tariff revenue has a positive impact on U.S. fiscal revenue and is expected not to cause severe effects. In contrast, the progress of the tax reduction bill and the government's spending cut proposals are the focal points of concern in the ongoing game.

!["Trump market" opening ceremony officially concluded: How does the market price the "debt crisis" from the rise in term premium?](https://img-cdn.gateio.im/webp-social/moments-554cf0ab1ce4cba8fd94d47fc0240820.webp01

!["Trump market" opening ceremony officially concluded: how does the market price the "debt crisis" from the rising term premium?])https://img-cdn.gateio.im/webp-social/moments-17df5a179b1cda58a37c9a5b92ef33df.webp(