The current market is facing dual pressures from the continuous expansion of U.S. debt and the rise in U.S. treasury yields. The total amount of the U.S. federal government's outstanding public debt is nearing $40 trillion, while a large amount of debt is about to mature and needs to be refinanced and rolled over at significantly higher interest rates. The inflation pressure brought by the recent rise in oil prices further exacerbates this issue, as higher financing costs may push up government interest expenditures and create more demand for borrowing and fiscal spending, worsening the debt growth trajectory.

At the same time, the overseas demand for U.S. treasury bonds is also facing changes. Japan may support the rapidly depreciating yen by reducing its holdings of U.S. treasury bonds, while China continues to promote the diversification of its foreign exchange reserves, gradually reducing its allocation to U.S. treasury bonds and increasing its gold reserves. The ongoing bond issuance by ultra-large tech companies is also diverting market demand for U.S. treasuries. As overseas demand for U.S. treasuries changes, refinancing pressures rise, and inflation concerns persist, the risk of further increases in U.S. treasury yields is growing.

$40 trillion debt coupled with 5% yield: pressure on the stock market is increasing

The yield on 10-year U.S. treasuries has risen quickly from a low of below 4.0% before the outbreak of the U.S.-Iran war to 4.70%, approaching recent highs. If it further approaches 5.0%, the attractiveness of bonds to capital will significantly increase. Long-term investors like pension funds can lock in a nominal yield of about 5% by allocating to long-term bonds without taking on the volatility risk of the stock market, and the risk of capital flowing from stocks to bonds, putting pressure on stock valuations, will also rise.

Currently, the S&P 500 index is still in an upward trend, with a key level in the trend model at 7,363 points, and the latest index reading is at 7,526 points. However, it has been in a sideways consolidation over the past two months, and recent upward momentum has weakened. The smooth moving average of the weekly RSI is still declining, and the period from August to September is generally a phase of relatively weak seasonal performance. If the index pulls back to around 7,000 points, a more favorable reversal condition may form from a technical perspective. With the November U.S. midterm elections approaching, policy uncertainty may also prompt fund managers to increase cash positions.

The pressure on tech stocks is even more pronounced. The Nasdaq index is currently operating below the 21-day moving average of 29,477 points and has broken below the previous converging triangle pattern; if it cannot return to that range and recover the upper edge, the risk of further retreat to around 26,500 points will increase. One of the important forces that previously drove the rise of tech stocks was the massive investment and growth expectations of ultra-large tech companies, but hefty capital expenditures have driven these companies' free cash flow into negative territory. Under the backdrop of the Federal Reserve's hawkish stance and rising inflation pressures spreading to more categories, the pressure on the stock market is increasing.

From pressure on stocks to asset rotation: gold and bitcoin may regain investor attention

As the scale of U.S. debt continues to expand, the divergence between bitcoin and the debt growth trend has widened to levels comparable to the bitcoin bear market during 2022. One of the core intentions behind the establishment of bitcoin was to hedge against the risk of sovereign debt continually swelling. Looking at the long-term trend, as U.S. government debt continues to rise, bitcoin has also generally followed a similar upward direction, only being overvalued or undervalued relative to the growth trend of debt at different stages.

Gold is also showing noteworthy technical signals. Its weekly RSI has dropped to levels that historically often appear before strong rebounds, and both gold and bitcoin are breaking upward through recent descending trend lines. If U.S. debt exceeds $40 trillion and the yield on 10-year U.S. treasuries further approaches 5.0%, the pressures on stock market valuations and liquidity may continue to increase, while gold and bitcoin may benefit from rising demand from investors for alternative and safe-haven asset allocations.

Overall, the current market is forming a group of mutually reinforcing macro variables: U.S. government debt is approaching $40 trillion, large-scale debt faces high-interest refinancing, and overseas holders like Japan and China may further adjust their U.S. treasury allocations, while the yield on 10-year U.S. treasuries is nearing the critical level of 5.0%. As U.S. treasury yields rise, the attractiveness of bonds relative to stocks increases, putting greater funding and adjustment pressure on stocks, especially tech stocks.

For investors, the focus should not only be on whether U.S. debt will exceed $40 trillion, but more importantly, whether the yield on 10-year U.S. treasuries can continue to rise towards 5.0%, and the resulting changes in capital flows. If the stock market comes under further pressure while gold and bitcoin maintain their breakthroughs of recent descending trend lines, capital may gradually shift from stocks to gold and bitcoin, driving a new round of cross-asset rotation.

The above views are partly derived from BIT on Target, Contact us for the complete BIT on Target report.

Disclaimer: The market is risky; investing requires caution. This article does not constitute investment advice. Trading in digital assets may carry significant risks and volatility. Investment decisions should be made after careful consideration of personal circumstances and consulting with financial professionals. BIT is not responsible for any investment decisions made based on the information provided in this content.

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