In recent financial developments, both Bitcoin BTC 0.50% and the S&P 500 are poised to conclude the third quarter with a downturn. This comes as a pivotal metric indicates that the proposition for holding bonds, in contrast to stocks and other risk assets, is the most compelling it has been since 2009.
Bitcoin, the leading cryptocurrency by market capitalization, traded at a value of $26,100. This signifies a 14% drop for the third quarter, assuming that these losses persist until September 30th. Concurrently, the S&P 500, which serves as a global benchmark for risk assets, including cryptocurrencies, recorded a decline of nearly 3% for the third quarter, closing at $4,320.05 on Friday.
A significant observation in the financial landscape is the equity risk premium. This metric, which represents the difference between the S&P 500’s earnings yield and the yield of the U.S. 10-year Treasury note, has plummeted to -0.58. This is its lowest point since 2009, as per data from the charting platform, TradingView. Historically, this spread has maintained an average of approximately 3.5 points post-2008.
This data suggests a shift in investment trends. The appeal of investing in stocks and other risk assets seems to be waning, especially when safe-haven government bonds are now offering comparatively higher returns. It’s worth noting that Treasury securities are perceived as risk-free. This is attributed to the backing they receive from the U.S. government, which has an impeccable record of not defaulting on its debts. Consequently, the 10-year yield is often viewed as the benchmark risk-free rate of return, against which returns from other assets are gauged.
Further insights reveal that the gap between the S&P 500’s dividend yield and the 10-year Treasury yield has also been narrowing. This spread has decreased to -2.87, a low that hasn’t been seen since July 2007.
The lucrative yields from bonds have also influenced the cryptocurrency market. While many crypto enthusiasts view Bitcoin as a safe-haven asset, akin to digital gold, its historical performance suggests otherwise. Traditionally, Bitcoin has acted as a pure liquidity play, often serving as a precursor to stock movements.
Alex McFarlane, co-founder of Keyring Network, shared his perspective on LinkedIn, stating, “Bitcoin is a non-yield bearing, risk-on asset. Consequently, it will be negatively impacted by a high USD risk-free rate due to portfolio rebalancing.” McFarlane further emphasized that unless Bitcoin can offer a risk-free rate, which it currently cannot, it’s unrealistic to consider trading BTC as an orthogonal portfolio component, especially in comparison to Proof-of-stake (POS) systems.
In the broader context, the S&P 500 earnings yield is calculated by dividing the sum of the earnings per share of the index’s constituent companies by the current index level. The dividend yield, on the other hand, represents the fundamental return an investor can anticipate from investing in the index companies.
The disparity between the earnings yield and the bond yield is a crucial tool for fund managers. It aids them in evaluating the relative appeal of these two asset classes.
