The opening ceremony of the "Trump Market" has officially ended: From the rise in term premium, we can see how the market prices the "debt crisis"

Author: @Web3_Mario

Abstract: This week, the cryptocurrency market experienced a relatively large shock, and the price trend also went out of the M head pattern. All of these indicate that as Trump's official inauguration on January 20 is getting closer, the capital market has quietly begun to price in the opportunities and risks after his election, which means that the opening ceremony of the "Trump market" driven by emotions, which has lasted for 3 months, has officially ended. So what we need to do now is to extract the focus of the short-term market game from a lot of messy information, so that it is conducive to making rational judgments on market changes. Therefore, in this article, the author still talks about his own observation logic from the perspective of a non-financial enthusiast, hoping to be helpful to everyone. In general, I believe that the prices of many high-growth risk assets, including the crypto market, will continue to be suppressed in the short term because the U.S. Treasury market has been adversely affected by the increase in term premiums and the rise in medium and long-term interest rates. The reason for this situation is that the market is pricing in the U.S. debt crisis.

Macroeconomic indicators remain strong, and inflation expectations have not increased significantly, so they have little impact on current price trends

First, let's take a look at what factors cause short-term price weakness. Last week, many important macroeconomic indicators were released. Let's take a look at them one by one. First, let's look at the U.S. economic growth data. The ISM manufacturing and non-manufacturing purchasing managers' indexes continued to rise. Since the purchasing managers' index is usually a leading indicator of economic growth, this indicates that the U.S. economic outlook is relatively positive in the short term.

Next, let's take a look at the situation of the job market. We will take four data for observation, non-farm employment data, job openings, unemployment rate and the number of initial unemployment claims. First of all, non-farm employment data increased from 212,000 last month to 256,000, far exceeding expectations, and the unemployment rate also fell from 4.2% to 4.1%. At the same time, JOLTS job vacancies also increased significantly, reaching 809,000. From the perspective of the more differentiated initial unemployment claims, it has also continued to decline, which shows that the outlook for the performance of the job market in January is also relatively optimistic. All of these show that the current US job market remains strong and a soft landing should be a foregone conclusion.

Finally, let's take a look at the inflation performance. Since the December CPI needs to be announced next week, we will observe its performance in advance from the University of Michigan's 1-year inflation expectations. Compared with November, the indicator has rebounded to 2.8%, but it is lower than expected, and this value seems to be within the reasonable range of 2-3% set by Powell. Of course, the specific development is still worth paying attention to. However, we can see from the changes in the yield of inflation-resistant bonds TIPS that the market does not seem to be overly panicked about inflation furniture.

In summary, the author believes that there are no obvious problems in the US economy from a macro perspective. Next, let's identify the core reasons for the current decline in the market value of high-growth companies.

The medium- and long-term interest rates of US bonds continue to rise. Under the bearish steep pattern, the term premium continues to rise, and the market prices the US debt crisis

Let's take a look at the changes in US Treasury yields. From the yield curve, it can be seen that in the past week, the long-term interest rates of US Treasury bonds continued to rise. Taking the 10-year Treasury bond as an example, it rose by 20BP in one breath. It can be said that the bearish steep pattern of US Treasury bonds has further intensified. We know that the effect of rising treasury bond interest rates on the price of high-growth stocks is greater than that of blue-chip stocks or value stocks. The core reasons are:

1. Impact on high-growth companies (usually technology companies and emerging industries):

Rising financing costs: High-growth companies rely on external financing (equity or debt) to support business expansion. Rising long-term interest rates increase debt financing costs and make equity financing more difficult because investors increase the discount rate for future cash flows.

Valuation pressure: The valuation of growth companies is highly dependent on future cash flows (FCF). Rising long-term interest rates mean higher discount rates, which leads to a decrease in the present value of future cash flows, thereby lowering corporate valuations.

Market preference shift: Investors may shift from riskier growth stocks to more stable value stocks with stable dividends, which will put pressure on the share prices of growth companies.

Limited capital expenditure: High financing costs may force companies to reduce R&D and expansion spending, affecting long-term growth potential.

2. Impact on stable companies (consumption, utilities, medicine, etc.):

The impact is relatively mild: Stable companies are usually highly profitable, have stable cash flow, and are less dependent on external financing, so rising interest rates have less impact on their operations.

Debt repayment pressure increases: If there is a high debt ratio, the increase in financing costs may increase financial expenses, but stable companies usually have stronger debt management capabilities.

Dividend attractiveness decreases: The dividend yield of stable companies may compete with bond yields. When treasury yields rise, investors may turn to bonds with higher risk-free returns, causing stable companies' stock prices to be under pressure.

Inflation transmission effect: If interest rates rise with inflation, companies may face cost pressure, but stable companies usually have a strong ability to pass on costs.

Therefore, it can be seen that the rise in the long-term interest rate of treasury bonds has a very obvious impact on the market value of technology companies such as cryptocurrencies. Then the key to the next question is to locate the core reason for the rise in the long-term interest rate of treasury bonds in the context of this interest rate cut.

First, we need to introduce the calculation model of the nominal interest rate of treasury bonds as follows:

I = r + π + RP

I represents the nominal interest rate of treasury bonds, r is the real interest rate, π is the inflation expectation, and RP is the term premium. Here we need to explain in detail. The so-called real interest rate is the interest rate that reflects the real return of bonds. It is not affected by market risk preference and risk compensation, and directly reflects the time value of money and economic growth potential. π refers to the average social inflation expectation, which is usually observed through the CPI or the yield of inflation-resistant bonds TIPS. Finally, RP The term premium reflects the compensation that investors give to interest rate risk. When investors believe that future economic development is uncertain, they need higher risk compensation.

In the analysis of the first part, we have made it clear that the current US economic development remains stable in the short term. At the same time, it can be observed from the TIPS yield that inflation expectations have not risen significantly. Therefore, the real interest rate and inflation expectations are not the main factors that push up the nominal interest rate in the short term. Then the problem is located on the factor of "term premium".

For the observation of term premium, we choose two indicators. The first is the ACM model to estimate the term premium level in US Treasury bonds. It can be seen that in the past period of time, the term premium of the US 10-year Treasury bond has risen significantly. From a numerical point of view, this factor is the main factor that increases the yield of US Treasury bonds. The second is the Merrill Lynch US Treasury option volatility, or MOVE indicator. It can be seen that in the recent period, the volatility has not changed dramatically. Usually, MOVE is more sensitive to the implied volatility of short-term interest rates because it has a larger weight. From this set of data, we can draw a conclusion that the market is not sensitive to the risk of short-term interest rate fluctuations. We know that short-term interest rates are mainly affected by the Fed's decisions. Therefore, it can be said that the market has not made obvious risk pricing for potential policy changes of the Fed. Therefore, the recent panic caused by the change in the direction of the Fed's interest rate decision in 2025 is not a direct factor. However, the continuous rise in the term premium shows that the market is concerned about the medium- and long-term development of the US economy. According to the current economic hotspots, this is obviously focused on concerns about the US fiscal deficit.  

So it is clear that the market is currently pricing in the potential debt crisis risk of the United States after Trump takes office. Therefore, in the next period of time, it is still necessary to observe political information and the views of stakeholders to think about whether their impact on debt risk is positive or negative, which will make it easier to judge the trend of the risk asset market. Take the news last week that Trump announced that he was considering entering a national economic emergency in the United States as an example. Due to the state of emergency, the International Economic Emergency Powers Act (IEEPA) can be used to formulate a new tariff plan. The Act unilaterally authorizes the president to manage imports during a national emergency. Therefore, the constraints and resistance to tariff adjustments will be further reduced, which undoubtedly amplifies the concerns about the potential impact of the trade war, which has already been alleviated. However, from the most direct impact, the increase in tariff revenue is undoubtedly a positive impact on US fiscal revenue, so I think the impact will not be very drastic. On the contrary, the progress of its tax reduction bill and how to cut government spending are the most worthy of attention in the entire game, and I will continue to follow up.