Author: @Web3_Mario

Summary: The cryptocurrency market experienced quite a lot of volatility this week, and the price trend also formed an M-shaped pattern. This is all a sign that as Trump's inauguration on January 20th approaches, the capital market has already begun to price in the opportunities and risks of his election, which means that the "Trump effect" driven by sentiment that has lasted for 3 months is officially coming to an end. So what we need to do now is to extract the focus of the short-term market game from the many confusing information, so that we can make a rational judgment on the changes in the market trend. Therefore, in this article, the author, from the perspective of a non-financial professional enthusiast, will talk about his own observation logic, hoping to be of some help to everyone. In general, the author believes that in the short term, many high-growth risk assets, including the cryptocurrency market, will continue to be suppressed, because the rise in US Treasury yields has had an adverse impact on them, and the reason for this situation is that the market is pricing in the US debt crisis.

Macroeconomic indicators remain strong, and inflation expectations have not shown a significant increase, so they have little impact on the current price trend

First, let's look at what factors are causing the short-term price weakness. Last week, many important macroeconomic indicators were released, let's take a look one by one. First, let's look at the US economic growth-related data, the ISM manufacturing and non-manufacturing purchasing managers' index have continued to rise, and since the purchasing managers' index is usually a leading indicator of economic growth, this suggests that the US economic outlook is relatively positive in the short term.

Next, let's look at the job market situation. We will extract four data points for observation: non-farm employment, job openings, unemployment rate, and initial jobless claims. First, non-farm employment increased from 212,000 last month to 256,000, far exceeding expectations, and the unemployment rate also declined, from 4.2% to 4.1%. At the same time, the JOLTS job openings also showed a significant increase, reaching 809,000. And from the more micro initial jobless claims, we can see that they have continued to decline, which also suggests that the outlook for the job market performance in January is relatively optimistic. All of this indicates that the US job market is currently maintaining strong momentum, and a soft landing should be a foregone conclusion.

Finally, let's look at the inflation performance. Since the December CPI data needs to be released next week, we will observe the performance of the University of Michigan 1-year inflation expectation in advance. Compared to November, this indicator showed a certain rebound to 2.8%, but it is still below expectations, and this value also seems to still be within the reasonable range of 2-3% defined by Powell. Of course, the specific development is still worth watching. But from the changes in the yield of the inflation-protected bond TIPS, the market does not seem to be overly panicked about inflation.

In summary, the author believes that from a macroeconomic perspective, there are no obvious problems in the US economy at present. So now let's locate the core reason for the decline in the market capitalization of high-growth companies.

The long-term US Treasury yield continues to rise, and the term premium continues to rise in a bearish steep environment, with the market pricing in the US debt crisis

Let's also take a look at the changes in US Treasury yields. From the yield curve, we can see that over the past week, the long-end yield of US Treasuries has continued to rise, with the 10-year Treasury yield rising by a whopping 20 basis points, which can be said to further exacerbate the bearish steep pattern of Treasuries. We know that the rise in Treasury yields has a greater suppressive effect on the prices of high-growth stocks than on blue-chip or value stocks, and the core reason is:

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

Increased financing costs: High-growth companies rely on external financing (equity or debt) to support business expansion. The rise in long-term yields increases the cost of debt financing, and equity financing also becomes more difficult, as investors demand a higher discount rate on future cash flows.

Valuation pressure: The valuation of growth companies is highly dependent on future cash flows (FCF). The rise in long-term yields means a higher discount rate, leading to a decrease in the present value of future cash flows, and thus putting downward pressure on corporate valuations.

Shift in market preference: Investors may shift from riskier growth stocks to more stable, dividend-paying value stocks, which puts pressure on the stock prices of growth companies.

Restricted 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 (consumer, utilities, pharmaceuticals, etc.):

Relatively mild impact: Stable companies usually have strong profitability and stable cash flows, and are less dependent on external financing, so the impact of rising interest rates on their operations is relatively small.

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

Decreased dividend attractiveness: 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, putting pressure on the stock prices of stable companies.

Inflation pass-through effect: If the rise in interest rates is accompanied by rising inflation, companies may face cost pressure, but stable companies usually have stronger cost pass-through capabilities.

Therefore, it can be seen that the rise in long-term Treasury yields has a very obvious impact on the market capitalization of technology companies such as cryptocurrencies. So the key question now is to locate the core reason for the rise in long-term Treasury yields in the context of the rate cut.

First, we need to introduce the calculation model of the nominal yield of Treasuries as follows:

I = r + π + RP

Where I represents the nominal yield of Treasuries, r is the real interest rate, π is the inflation expectation, and RP is the term premium. Here we need to explain this in more detail. The so-called real interest rate reflects the true return of the bond, not affected by market risk aversion and risk compensation, and directly reflects the time value of money and the potential for economic growth. π refers to the average social inflation expectation, which is usually observed through CPI or the yield of inflation-protected bonds TIPS. Finally, RP is the term premium, which reflects the compensation for interest rate risk that investors demand. When investors believe that the future economic development is uncertain, they will require a higher risk premium.

In the analysis of the first part, we have clearly stated that the US economy is maintaining a healthy development in the short term, and from the TIPS yield, we can also observe that the inflation expectation has not shown a significant rise, so the real interest rate and inflation expectation are not the main factors driving the rise in nominal yields in the short term. So the problem has been localized to the "term premium" factor.

Observations on the term premium, we have chosen two indicators, the first of which is the ACM model's estimate of the term premium level in US Treasuries. It can be seen that over the past period, the term premium of the US 10-year Treasury bond has experienced a significant rise, and from a numerical perspective, this factor is the main driver of the rise in US Treasury yields. The second is the Merrill Lynch US Treasury Option Volatility Estimate, also known as the MOVE index, and it can be seen that over the recent period, the volatility has not experienced a dramatic change, and under normal circumstances, MOVE is more sensitive to the implied volatility of short-term rates, as it carries a larger weight. From this set of data, we can draw a conclusion that the market is currently not sensitive to the risk of volatility in short-term rates, and we know that short-term rates are mainly influenced by the Federal Reserve's decisions, so it can be said that the market has not priced in the risk of potential policy changes by the Federal Reserve, and therefore the recent panic over the 2025 Federal Reserve rate decision direction change is not a direct factor, however, the continuous rise in term premium indicates that the market is concerned about the long-term development of the US economy, and based on the current economic hotspots, this is clearly focused on concerns about the US fiscal deficit problem.

So it can be clearly stated that the market is currently pricing in the potential debt crisis risk in the US after TRON's inauguration. Therefore, in the coming period, observing political information and the views of stakeholders is still necessary to consider their impact on debt risk, whether positive or negative, which will make it easier to judge the trend of the risk asset market. For example, last week's news of TRON declaring consideration of a national economic emergency in the US, as under a state of emergency, the International Economic Emergency Powers Act (IEEPA) can be used to formulate new tariff plans. This act unilaterally authorizes the president to manage imports during a national emergency. Therefore, the constraints and resistance to tariff adjustments will be further reduced, and this undoubtedly amplifies the concerns about the potential trade war impact that has already eased somewhat. But in terms of the most direct impact, the increase in tariff revenue will undoubtedly have a positive impact on US fiscal revenue, so the author believes that the impact will not be very severe. On the contrary, the progress of its tax cut legislation and how to reduce government spending are the most worthy focuses of the entire game, and the author will also continue to follow up on this.