【US Interest Rates Exceed 5% & Yen Hits 158 Range】

Why did global risk assets crash? A look at the macroeconomic upheaval and survival strategies for investors.

The truth behind US interest rates exceeding 5% and the yen hitting the 158 range: Macroeconomic shifts, the chain reaction of falling asset prices, and survival strategies for investors🪖❗️

The financial markets were hit by a sudden shock triggered by the release of economic indicators showing the “overwhelming strength” of the US economy.
The US 10-year Treasury yield reached 5.12%, and the 5-year yield hit 5.03%, both marking their highest levels in approximately 19 years since 2007.

Due to the ripple effects of this rapid interest rate hike (deep selling), major risk assets such as stocks, gold, silver, and crypto assets (Bitcoin) were sold off simultaneously, and the foreign exchange market saw a dramatic depreciation of the yen and appreciation of the dollar, briefly reaching the 158 range.

“Why is the yen weakening even though the Bank of Japan raised interest rates?” “Why did gold and Bitcoin, which are considered inflation hedges, fall as well?”
In this column, we will not just confirm facts along a timeline, but will thoroughly delve into and explain these topics from the perspectives of primary information and market structure (options, supply and demand, and the nature of the game).

Chapter 1

Four complex factors that caused US long-term interest rates to
　　break through the “5% barrier”❗️

This sudden surge in interest rates was not caused by a single economic indicator. It is a perfect storm (complex factors) triggered by the simultaneous convergence of four elements: “macroeconomics,” “hawkish remarks by Fed officials,” “geopolitical risks and crude oil,” and “deteriorating bond supply and demand.”

1. Re-inflation risks lurking in the “details” of the PMI (Purchasing Managers’ Index)
   The biggest surprise for the market was that the US PMI showed its strongest levels in about 6 years for the manufacturing sector and about 5 years for the service sector.
   However, what market participants truly feared was not the “high level of the composite index” itself, but the internal structure (components) of the indicators.
   Resurgence of Prices Paid: The costs companies pay for raw materials and services are surging again, casting doubt on the inflation convergence scenario.

Backlog of Orders
and delivery delays
Supply is failing to keep up with demand, causing economic bottlenecks.
Robust Employment: The labor market remains overheated, reigniting concerns about a wage-inflation spiral.
These all show a typical pattern where both “cost-push” and “demand-pull” inflation are likely to reignite simultaneously.

1. Fed official (Governor Barr)
   　　checks “additional rate hikes”!
   Immediately after the indicator release, Fed Vice Chair for Supervision Barr stated, “It is highly likely that further interest rate hikes will be necessary to return the inflation rate to the 2% target.”
   The market had been searching for the “start date of rate cuts,” but this statement caused it to rapidly price in the possibility of “resuming rate hikes (not just Higher for Longer, but Even Higher).” The policy rate outlook (such as Fed Watch) shifted dramatically in just one day from “holding steady for the year/gradual rate cuts” to “pricing in additional rate hikes.”

2. Rising energy prices and geopolitical risks push up “expected inflation rates”
   Adding fuel to the fire is the energy market.
   In addition to reports of Russia banning diesel fuel exports, geopolitical uncertainty around the Middle East and the Strait of Hormuz caused crude oil futures prices to soar.
   Interest rate components can be broken down into “real interest rates” + “expected inflation rates.” High crude oil prices directly pushed up the market’s “expected inflation rate,” which became the driving force pushing nominal interest rates (10-year Treasury yield 5.12%) significantly higher.

3. Poor US 5-year Treasury auction
   “No one wants to buy government bonds” supply-demand shock
   What sealed the market’s concerns was the result of the US 5-year Treasury auction held on the same day. There was little bidding from investors relative to the issuance amount, and a “tail” occurred where the highest accepted yield significantly exceeded the pre-auction trading (WI) yield.
   With the US government continuing to issue massive amounts of deficit-covering bonds, major buyers such as foreign central banks and large institutional investors refrained from buying, wary of “further interest rate hikes.” The collapse in supply and demand, where “buyers do not gather for the oversupply of bonds,” pushed yields up to 5.03% at once.

Chapter 2

The logic of “real interest rates” that caused
　a chain reaction of declines in stocks, gold, and crypto assets

When the yield on US Treasuries—the “lowest-risk asset yield in the world”—exceeds 5%, the ratings and valuations of all risk assets around the world are forcibly revised.
The “overwhelming superiority of risk-free assets” brought about by rising real interest rates
The key to unraveling the true nature of rising interest rates lies in the significant rise in “real interest rates,” which is the nominal interest rate minus the expected inflation rate.

When real interest rates remain high in positive territory, the opportunity cost (Hold Cost) of holding assets that do not generate interest (gold and crypto assets) jumps dramatically. In a state where “you can earn a high real return just by depositing in a bank or government bonds,” the incentive to intentionally hold gold or Bitcoin decreases.

Trends in Big Tech stocks
AI competition and individual fundamentals
In the stock market, the three major indices (NY Dow, S&P 500, Nasdaq) all fell.
However, observing the heat map, structural themes other than “rising interest rates” are also intertwined in the background of individual stocks.

Google (Alphabet) decline
With Meta announcing its new generation image generation and multimodal AI model “Muse,” concerns about share clashes in AI search and advertising areas have intensified.

Amazon (Amazon) decline
With the spread of “AI shopping agents,” user purchasing behavior has changed drastically, and pressure on profit margins due to the automation of price comparisons has been viewed as a concern.

Meta’s Rise

The path to new monetization through the expanded use of “Muse” was highly evaluated by the market, leading to a counter-trend rise amidst the wave of tech sell-offs.
In this way, while under general upward pressure from interest rates, we have entered a phase where the fortunes of individual stocks are clearly diverging due to the battle for AI dominance.

Chapter 3

Dollar-Yen in the 158 range!
The depths of the “weak yen” that continues even with BOJ rate hikes
Despite the Bank of Japan (BOJ) taking steps to end negative interest rates and implement additional rate hikes, the yen’s depreciation in the foreign exchange market has not stopped, briefly breaking into the 158 range. To unravel this “seemingly contradictory market reaction,” it is necessary to analyze it across five layers based on primary information.

1. The “2-year Treasury yield spread” between Japan and the US and the terminal rate
   What is most highly correlated with the movement of the exchange rate (dollar-yen) is not the 10-year Treasury yield, but the “2-year Treasury yield spread between Japan and the US.”

Even if the BOJ raises its policy interest rate slightly, because US 2-year Treasury yields have risen significantly in response to strong PMI data, the interest rate spread between the two countries has widened rather than narrowed. What the market is looking at is not the “current interest rate” but “how far interest rates will ultimately go (the terminal rate).” With the US beginning to explore “further rate hikes,” overwhelming pressure for a stronger dollar has reignited.

1. The market’s insight into the BOJ’s
   “cautious stance”!
   The reason the yen continues to weaken even when the BOJ raises rates is that the market sees through the BOJ’s own “extremely cautious and gradual stance toward additional rate hikes.”
   The message that “we will raise rates, but the accommodative financial environment will continue for the time being” has justified the continuation of the “yen carry trade,” where investors use the interest rate spread to sell yen and buy dollars.

2. The surge in insurance premiums indicated by the
   dollar-yen option “smile curve”
   Checking primary information from the options market reveals an interesting phenomenon. In the volatility smile curve (the volatility structure for each strike price), the insurance premiums for “put options in the direction of a stronger yen (weaker dollar)” are abnormally expensive.

What does this mean?
Many market participants continue to trade with the belief that “buying dollars and selling yen is advantageous from the perspective of short-term interest rate spreads (bullish on the dollar),” but at the same time, they harbor the fear that “they do not know when intense foreign exchange intervention by the Japanese government and
the BOJ will occur.” Therefore, they are paying high premiums for “insurance against a stronger yen (hedging)” to compensate for losses if the yen strengthens.

1. CME (Chicago Mercantile Exchange) open interest map and assumed range
   Checking the distribution of open interest in yen futures and options on the CME highlights where market participants have set their “walls.”

The assumed range the market is looking at has an upper limit of around 160 yen, the “intervention alert line,” and a lower limit of around 152 yen, the “dip-buying/option barrier line,” suggesting that volatile price movements (high volatility) within this range will continue for some time.

Chapter 4

Gold, Silver, and Bitcoin

The flip side of supply and demand and large option expirations
Gold and Bitcoin, which are considered hedge assets, also faced selling pressure, but when dissecting the trading entities (players), a completely different structure emerges.
Those who sell gold, those who buy gold
Behind the decline in gold prices, an intense conflict in supply and demand is occurring between “paper gold” and “physical gold.”

Sellers (short-term paper market)
Following the rise in US interest rates and the stronger dollar, hedge funds and speculators rapidly unwound their COMEX gold futures positions (dumping long positions).

Buyers (long-term physical/public institutions)
During the price decline, dip-buying of gold ETFs, private demand from Asia including China, and “physical buying” by central banks around the world that are moving away from dollar dependence (de-dollarization) are functioning as strong support for the downside.
Once the speculative selling runs its course, the structural physical buying by central banks will support the floor, so it is highly likely that a solid trend will be regained in the medium to long term.

Bitcoin
“Real buying,” leverage, and large option expirations
In the decline of Bitcoin, the difference between physical investors and speculators using leveraged trading was clearly apparent.
In this rise and fall process, the “inflow of funds via physical ETFs (real buying)” by institutional investors remained relatively stable. However, the forced liquidation (loss cuts) of leveraged long positions (bullish positions using borrowed money) that had expanded excessively in the derivatives market occurred one after another, which triggered a chain reaction of sharp price drops.

Furthermore, what should be noted is the large option expiration (SQ) approaching on Friday, September 25th.
A “gamma squeeze” phenomenon, where prices are magnetically drawn toward the “max pain” (the price range where option sellers make the most profit) where open interest is concentrated, is likely to occur, and since there is a possibility that the trend will change dramatically due to position restructuring (rollover) after the expiration passes, maximum vigilance is required.

Chapter 5

[For beginners and individual investors] The cruel reality of short-term investment and the laws of survival!

In a market phase where things move this violently, it is easy to think, “I’ll make a quick buck with day trading or swing trading.” However, there is a cruel truth I can share from over 30 years of market experience.
The “true identity of the opponent” you are fighting in short-term investing‼️

When individual investors engage in short-term trading from their home PCs or smartphones, who are the rivals on the other side of the screen?

1. Institutional investors at investment banks (professional dealers): Professionals who utilize vast information infrastructure and Bloomberg terminals.

2. Major hedge funds: Quantitative strategies (quants) that exploit market distortions in milliseconds.

3. High-frequency trading (HFT) and cutting-edge AI: Algorithms that use ultra-high-speed communication to front-run individual investors’ orders.
   Engaging in short-term trading on the “same playing field” as them—who are overwhelmingly superior in knowledge, tools, and speed—is the same as an amateur challenging a professional shogi player or the latest AI shogi software empty-handed.

The difficulty of day trading as shown by
academic research data🎓

Research data from numerous universities and financial research institutions objectively proves the harshness of short-term investing.
The 90-90-90 rule: 90% of beginners who start short-term trading lose 90% of their capital within 90 days and exit the market.

Less than 1% can keep winning: According to research tracking market data from places like Taiwan and Brazil over several years, less than 1% of all day traders were able to maintain positive profits over a period of months to years.

The world of short-term investing is a “zero-sum game” where the sum of participants’ profits and losses equals zero (effectively a negative-sum game when considering trading commissions and taxes). Behind every winner, there is always a loser.
On the other hand, long-term index investing, which invests in global population growth and technological innovation, is a “positive-sum game” where the pie of the entire economy grows. If you make time your ally, it holds the potential for all participants to profit.

The “3 Iron Rules” that those who still want to challenge short-term investing must follow
If you are going to engage in short-term trading as a “hobby or challenge,” please impose the following three rules as absolute conditions.

[Rule 1]
Only use “surplus funds” that won’t affect your life if lost
Never invest living expenses or future savings. Mental pressure will fatally ruin your judgment.

[Rule 2]
Thorough automation of “Stop Loss” rules
Wishful thinking like “it will come back someday” will destroy your capital. It is essential to mechanically place a stop-loss order at the same time as your entry.

[Rule 3]
Fix your time horizon and eliminate emotions
Keep a trading record (diary) and quantify your winning and losing patterns. “Revenge trading” driven by emotion is a shortcut to self-destruction.

Summary☝️

Upcoming events to watch to survive the rapidly changing market
The current financial environment, where US interest rates have reached 5% and foreign exchange and risk assets are significantly shaken, signifies a full-scale return to a “world with interest rates.”
To forecast future market trends, the following events and indicators are the most important points to check.

When the market is engulfed in panic, it is important not to be swayed by noise, but to return to primary information such as “interest rates, exchange rates, real interest rates, and supply and demand” and the basic principles of macroeconomics. While steadily maintaining long-term asset formation, let’s cultivate the eye to calmly observe macroeconomic changes.