»Fast Profits Daily by Equitymaster

On This Day - 2 MARCH 2021
Why Rising Bond Yields Spooked the Market

Vijay Bhambwani, Editor, Fast Profits Daily

Last week the markets took a tumble.

One of the most important reasons was the rising bond yields in the US.

Most traders were caught off guard. This was something new they had to think about.

This is unfortunate because all financial markets are interlinked. You can't trade one without keeping an eye on the rest.

In this video, I'll tell you why the markets were spooked and also why you need to keep an eye on bond yields from now on.

Let me know your thoughts in the comments.

Hi, this is Vijay Bhambwani and in this video, I am here to talk about why the bond yields have created such a furore in the markets and why equity markets got the shivers last week, thanks to the bond yields.

But first, I want to answer a few questions that my viewers have expressed concerned over the video that I recorded yesterday titled Beware the Ides of March.

There has been a slight act of omission on my part, and I apologise for that. I had recorded a video in the end of 2019 giving out a calendar, month by month and quarter by quarter calendar, wherein I had said that the end of every calendar quarter the mutual fund industry pushes up the NAVs and the March ending quarter is the most bullish of all because this is the financial year end and the mutual funds are really very aggressive in pushing up stock prices. So March end in the time when you should not short sell.

Some, viewers were not clear as to video title the Ides of March was talking about bearishness of bullishness. It's so let me tell you that my view of March end being propped up by the mutual fund industry to a window dress or gravy cover their NAVs, that view still remains.


What I just told you about was that the amount of stacking, the over leverage or the super leverage that you can take any or trades, will come down sharply in the month of March because money will be a problem to get by.

It will be difficult to raise money being the end of the financial year. Everybody is basically paying of loans, cleaning up their books of accounts, shrinking the size of their balance sheet, and therefore, traders might just trade a little less.

This was triggered in part, by my own experience. I run a limited company that trades for a living. Yesterday I had to top up my margin account because we simply could not make do with what we had given to the brokers, because I, like admitted in my previous videos, unashamedly admit that I stack. Intraday leverage is something that we use. When the brokers are giving it without charge we definitely take it. We press on the accelerator to supercharge my P&L accounts on intraday trades.

So I decided to record a video for my viewers and friends to tell them that this is something that can happen to you. Money will be difficult to come by and yet SEBI is asking for higher and higher margin amounts, thanks to lower super leverage. For example, from the first of March, you have intraday leverage of 2X. That means you pay for one lot and you can take exposure of two lots intraday.

But from first of June is going to go down to 1.33 That means you pay for 10 lots, and you can only take leverage of 13 lots intraday.

And from first of September it will become one is to one. You can only trade as much as you can pay for. That was the purpose of recording the Ides of March video. Of course, the mutual funds will do the magic, magic that they do on every quarter end, especially March end because this gets them the assets under management.

So, friends, let's dive into the next topic. Why did the bond yields creates such a big furore? You see, if you if you were to go in a horse carriage, a Tonga or a Victoria or whatever you want to call it, you will realise that the horse is made to wear blinkers. In Bombaiya bhasha, in Hindi, it is called ghode ka chashma. It is not actually a chashma, but these are blinkers so that the horse can only see forward and it does not get frightened by the amount of vehicular traffic on the roads. Otherwise it will stop pulling the carriage.

Most of the traders that I talk and I have trained thousands of them, are wearing blinkers in the market when it comes to their trades. they don't see the world view, and the pull and push on prices that is coming from other asset classes that they must.

Do you know that equity markets in terms of turnover are the smallest? The largest is the forex markets, which are 100 to 200 times bigger than equities. The second largest is the bond market, which is the fountain of all the money. It is a source of the money supply, which is 50 to 70 maybe even 100 times, depending on which your country you are talking about, bigger than the equity markets. Then comes the commodity markets which is 20 to 50 times bigger than the equity market.

Now, if you're going to be focused only on equity markets and you ignore all the other markets which have a definitive pull and push on equity prices, my friends I am sorry, but you're wearing blinkers on.

What happened in the bond markets? Now this is the place where Mr Richie Rich and Mrs Richie Rich invest their money. These are the big-ticket investors who move the needles and gauges in the markets. Now, unfortunately, the MMT or the modern money market theory is telling us that negative interest rates are okay. Zero interest rates are okay. Have you asked the guy who is writing the cheque if he is okay to take negative interest rates? That means he wants to pay the bank interest just to keep a fixed deposit. I am sure the guy is not amused.

So what these guys started doing was to sell off the bonds that were yielding poor yields. What were they asking? They were asking for higher yields. Now you've seen Robin Hood traders rebel against hedge funds and bringing some hedge funds down thanks to their trades in GameStop. You've seen the Wall Street Bets or the Redditors come and attempt an abortive silver squeeze.

So it was only a matter of time before the guys who write out the big cheques started asking higher interest rates. What happens when interest rates goes up? The cost of money goes up. When the cost of money goes up, the cost of doing business goes up. When the cost of doing business goes up and people like me who are professional day traders and professional stack traders know that trading is also a business, you have to take care of and account for each and every input cost, and money is also a cost.

Remember, in the rising span margin scenario, I will need to put more and more money in the market to be able to take the same amount of positions and intraday leverage that I was taking six months ago. If the cost of money is going to go up, either I will reduce my exposure in the market, or I might even be forced to sell deliveries to raise cash.

This is something that savvy investors who think about tomorrow, day after, six months and one year down the line, read the writing on the wall, that rising interest rates are going to make money more expensive and therefore trading more expensive. Which is why the bond yields sent shivers down the spines of the market last week.

In the month of June, my memory is a little sketchy, it could be June, or it could be July 2019. I had written an article on Equitymaster. It is still there in the archives. I had written as early as mid-2019 that the negative to zero interest rates are not sustainable and there will be a time when the big ticket cheque writers will start demanding more money, more interest, rather, and that is when you will see shivers coming down to financial assets.

So, friends, what you are seeing right now is a tug of war between big money and the central bank's giving out very poor interest rates. This is a very, very interesting time to live in. This is history being made. You're seeing Brexit. You're seeing the small guy, thanks to Robin Hood and Reddit humbling the hedge funds and I'm keeping an open mind about anything can happen.

But what I am sure about is that volatility is going to go up, number one. Number two, the amount of money that will require for trading will also go up, and therefore entry barriers or the hurdles that are to be crossed before you can become a successful day trader, will become increasingly higher. It will become increasingly difficult to succeed at trading.

So may the best trader win. I wish all my viewers very, very successful trading career ahead but do note that it does not pay to wear blinkers on your eyes. Take a 360 degree worldview. Each and every asset class has its own pull and push on the other asset classes, and you can only ignore the other three asset classes to trade and only one asset class at your own peril. Let's stay sharp. Let's stay wise and let's win.

On this cheerful north, I bid goodbye to you, but not before reminding you, if you're watching this video on YouTube please subscribe to my YouTube channel if you haven't already done so. Click on the bell icon to receive instant alerts about any fresh videos being put up out here and in the comments section do let me know what you think of this video.

Help me reach out to fellow like-minded traders by referring mine video to your family and friends. I wish you have a very profitable day ahead. Vijay Bhambwani signing off for now. Thank you for watching. Take care. Bye.

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst

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