🥛 Why you need to watch yields 📈

GM. This is Milk Road, the newsletter saving you from scratching your head every time the bond market stumps your portfolio.

Here’s what we’ve got for you today:

✍️ Why you need to watch yields.
✍️ Calling all crypto nerds.
🎙️ The Milk Road Show: What Does the $100M Galaxy x Sky Deal Mean for the Future of DeFi?
🍪 TCG Secondary marketplace volumes hit an ATH of ~$4M.

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Prices as of 2:00 p.m. ET. Powered by CoinGecko.

WHY YOU NEED TO WATCH YIELDS 📈

Last Wednesday we sat at yet another crossroad:

If oil stayed below ~$95, the rally would likely continue, and if oil reared back above ~$100, Bitcoin could suffer.

Since then, Brent has closed at $103.08, up ~4%, Bitcoin fell 2.1%, and the 10Y (what investors need to get paid to risk holding U.S. government debt) jumped 15 bps in a day.

Here's where oil sits today:

WTI is at ~$92.84, back under that $95 line.
Brent is at ~$105.81, still above $100.

Source: TradingView

So the fork now says two things at once, and Bitcoin, at ~$83.9K, has sat above the ~$82.8K May high throughout it all.

It would be an easy story if the 10Y had followed oil. Oil made somewhat of a round trip this month, with Brent going from $108.75 on Sep 15 to $99.25 last Tuesday, then back to ~$105.81, and WTI going from $100.75 to $90.52, then back to ~$92.84.

The 10Y, on the other hand, made a one-way trip from 5.00% to 5.24%, up 24 bps since the day before the Fed hiked. John's Macro Index dropped to -0.87 on Monday due to the bond market and has continued to decline since.

Source: U.S. Treasury and FRED

Breakeven inflation sounds like something you scroll past, but it’s important to pay attention to it right now.

The 10Y yield is two things stacked together: what the market expects inflation to be and the extra it pays you on top. That extra is the real yield, the real return an investor makes over and above inflation.

Sep 15, the day before the Fed hiked: 5.00% yield - 2.38% expected inflation = ~2.62% real yield. Monday: 5.24% yield - 2.34% expected inflation = ~2.90% real yield.

Put another way, bond buyers are asking for a bigger paycheck for lending to the U.S. government, and the inflation forecast has dipped slightly.

Think of expected inflation as the market's guess at what your groceries cost next year, and the real yield as the raise you demand for lending your money in the meantime. The expectation slipped from 2.38% to 2.34%, and the ask went up by ~28 bps.

So the whole story comes down to one question: if bond buyers aren't afraid of oil-driven inflation, what are they afraid of?

Most people would say oil, since it's been the headline all week, right?

Well, part of the answer is sitting in a corner of the bond market we said last Wednesday had barely moved…

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THE 10-YEAR DIDN'T GET THE OIL MEMO (P2) 📈

Last Wednesday we pointed out that the 2Y had jumped while the 30Y barely flinched, and that they couldn't both be right.

Since the Sep 15 close, the day before the Fed hiked, the 2Y is up 25 bps to 4.92%, the 10Y is up 24 bps, and the 30Y is up 20 bps to 5.56%. The whole curve moved.

Source: U.S. Treasury

The 2Y is the market's bet on the Fed over the next couple of years and the 30Y is the bet on everything after that, so a move in both means lenders are worried about two different things.

On the front end, the worry is a Fed that keeps hiking into a strong economy, and oil is a partial input to that. Further out, it's the term premium we showed you Friday.

Bond buyers are pricing a Fed that keeps hiking into a strong economy, and oil is a partial input to that.

To be fair to the Fed, it moved first. It hiked on September 16 for the first time since 2023, and the last time we checked, traders put the odds of another hike at the October 27-28 meeting above ~70%.

As John flagged on Monday, the economy isn't giving it a reason to stop. The Atlanta Fed's GDP tracker has the economy growing at ~5.0% this quarter, and jobless claims fell to ~197K.

Does oil still matter? It does, mostly through the Fed.

August headline inflation was 3.4%, while core inflation was 2.4%. The difference is entirely explained by the rise in gasoline prices.

The oil market itself is also tighter than WTI makes it look. The November Brent contract is ~$7.72 above December, up from $5.44 on Sep 15 and $3.84 last Tuesday, which means buyers are paying a premium for barrels they can get now over those they can get later.

Source: TradingView

November expires tomorrow, so part of that difference is the squeeze that comes with expiry.

And two weeks of data isn't enough to say how much of the move is oil and how much is the Fed's own momentum.

So what would bring the real yield back down?

Two things:

Oil giving back its premium, which would talk traders out of some of those extra hikes.
Growth cooling enough that the Fed doesn't need them.

The second one looks a long way off with GDP tracking ~5.0% and claims near their lows, which puts most of the weight on oil and on what the Fed says next, with PCE landing Wednesday and CPI on October 14.

Which leads us to gold…

Gold is the classic scary-week asset, and since Friday's newsletter it has dropped from ~$4.32K to ~$4.17K, a -3.4% move that is bigger than the Nasdaq's -0.9% or the S&P 500's -0.8%.

Source: TradingView

Gold pays no interest, and the real yield on a 10Y Treasury has gone up, which explains the pullback in gold.

Bitcoin, meanwhile, is roughly where it was at Friday's close, ~$83.9K, after closing at ~$ 84.5K last week.

It pays no interest either, and a ~5.2% Treasury yield is the toughest competition it has faced since 2007.

If oil falls and the hike odds fade, the pressure on both eases. If the Fed keeps going regardless, gold's drop this week could be a preview of what yieldless-assets could face.

Translation: Gold’s reaction to rising yields could be the pre-cursor to what happens to BTC next.

The line in the sand we've been using for Bitcoin is still the May high at ~$82.8K, and it's still above that.

So yes, oil is part of the story. But since the Fed hiked, the 10Y has climbed on real yields, with the inflation forecast slightly lower, which means a peace deal that sinks oil prices should help, but may not be enough on its own to pull yields back down.

Gold and Bitcoin have faced the same yields all week, and so far only gold has flinched, down ~3.4%, while Bitcoin remains strong.

So what happens next?

Real yields are the one to watch. Rising oil, coupled with what the Treasury and the Fed do next will trigger the next moves across asset classes.