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The US10Y yield has rebounded from a critical point again.
Why is the increase in bond yields bad for risky assets?
The main issue is ‘leveraged’ investing, or borrowing to invest.
1️⃣ LEVERAGED
Leveraged means borrowing, i.e., taking out loans to invest in stocks and other assets.
Three years ago, the borrowing cost was 0%. That means you take out a loan, say you’ll pay it back in 5 years, and the interest rate is 0. In this situation, even if you make a 1% profit from your investment, it becomes a significant return. Who wouldn’t want to take this risk?
Borrow all the money and invest in bitcoin. Realize a profit within 3 years and continue the game.
2️⃣ WHAT DID THE FED DO?
The Fed increased interest rates, raising the cost of borrowing.
So, money has become more expensive. Continuing with the example above, you’re borrowing to invest in risky assets. The moment you take out the loan, you’re starting with a -5%. To achieve a 1% return, you need to make at least a 6% profit.
Of course, in this situation, the appetite for risk decreases.
