The 3 Letters That Can Tank Your Portfolio

The 3 Letters That Can Tank Your Portfolio

We’ve been laser-focused on the impact of the Treasury yield and its impact on the market lately, and for good reason. The fate of the S&P 500 in 2023 partially hinges on the 10-year Treasury yield (TNX), as we’ve explained in previous issues.

There’s a LOT of information that affects market performance, not to mention the overall economy, but the TNX is one of the most influential. Today, we’re going to delve more into the TNX’s history, importance, and how you can use it to inform your trading decisions.

hundred dollar bills

Giving the Government a Loan

The United States Treasury – aside from minting money, collecting taxes, and managing bills – manages loans given to it by U.S. citizens. You may issue a loan to the Treasury by purchasing bonds, notes, or bills. The difference among the three lies in their maturity dates.

The money you loan to the government by purchasing one of these fixed-income securities is one of the safest investments you can make, so it’s also one with the lowest return on investment. However, it’s backed by the “full faith and credit” of the U.S. government. On the maturity date of the loan, the lender will receive a full return on the investment because the government have the capacity to collect revenue – and print more money, should it need to.

But where does this money go? Into the Capital Projects Fund – an account that earmarks money for special need-based projects. States and other entities can apply for grants from this fund, and currently, it’s focused on strengthening infrastructure and communications in rural and tribal areas hard-hit by the COVID-19 pandemic.


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The “Yield” Signs

When analysts look to Treasury yields – or the interest that bonds, notes, and bills accrue – they watch one in particular: the 10-year Treasury bond yield. This figure can set the precedent for mortgage rates and influence the Federal Reserve when it sets interest rates.

The U.S. sells these bonds at auction and dictates the yield in the bidding process. As economic confidence rises, the bond price drops, and the yield rises. In a healthy economy, investor confidence is high, and they tend to buy up riskier investments elsewhere, like the stock market.

When things are shaky and investors are looking for safer investments like bonds, however, bond prices rise and yields fall. We also may see more demand internationally for these investments because the U.S. government is seen as a financial safe haven.

The length to maturity of the 10-year bond is attractive to investors – the longer their money is tied up in a bond, the higher the yield. A normal yield curve is typical – shorter-term investments pay less at maturity, while longer-term investments pay more.

Where we get in trouble, however, is when the 10-year Treasury yield inverts. When long-term interest rates like those associated with a 10-year bond start dovetailing closer to the rates seen with shorter-term rates, historically, it has indicated an impending recession.

Watching the TNX and More in 2023

Obviously, several factors have to come together to facilitate a full-on recession, but traders watch the yield curve as the Fed announces rate hikes, inflation rages, and other economic markers speak to the possibility.

As we discussed last Friday, despite the current status of the yield curve, we see signs of optimism for 2023. We foresee Wall Street’s actions being dependent on economic announcements, like fewer Fed rate hikes.

This week, however, we’re watching earnings season – we’ll cover the big financial firms’ announcements this week, which can set the tone for the rest of the season. Stay tuned.

In the meantime, as we make careful investing decisions based on the TNX, earnings, and other important data, you have the opportunity to make money from the reckless decisions of other investors.

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Sincerely,

John and Wade


Article printed from InvestorPlace Media, https://investorplace.com/tradingopportunities/2023/01/the-3-letters-that-can-tank-your-portfolio/.

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