This Indicator scares me as an Investor…

Hey Next Level Tribe,

This is pretty important ….

Yesterday, my friend Ian sent me this:

This is the Treasury's 2024 buyback operation and in short it seems like good news for investors, but I am feeling extremely uncomfortable and even fearful…. read on to understand why and what to do.

_{Become a Market Maker and profit regardless of market directions}

Before that… last Thursday, I invited my friend Terence (The “Market Maker” genius) to do a zoom sharing but it was only limited to 500 and a lot of you messaged in to say you can’t get in….

He shared about how to make money on the side as a “Market Maker” and whether the market goes up or down, we can still benefit not by trading but by facilitating the liquidity as a market maker/ liquidity provider.

I am inviting him back again this Thursday so those who missed can attend.
Again, there is a limit so do register for the zoom link and get in there early: https://www.ascensionmasterclass.com/tnlbonus

(Note: he does have products and services to offer and I do get affiliate fees, but I really think his sharing is really valuable and helps us as an investor, it is not just a sales pitch)

After you register, do continue reading the article:

What Are Treasury Buybacks and Why Most Investors are Happy

Imagine the U.S. Treasury as a big company that has issued lots of IOUs (called securities) to borrow money. A Treasury buyback is when the Treasury decides to buy back some of these IOUs from the market. Think of it as the government paying off part of its debt ahead of schedule.

Why Do They Do This?

• Improve Liquidity: This means making it easier for people to buy and sell these securities without causing big changes in their prices.

• Manage Debt: Helps the government manage its debt levels more effectively and maintain a healthy financial system.

Why Is This Important?

1. Market Liquidity:

   • Enhanced Liquidity: When the Treasury buys back securities, it increases the demand for them. This higher demand can push up prices and make these securities easier to trade.

   • Effect on Prices: More liquidity means less price fluctuation when buying or selling these securities. This stability can attract more investors, which further improves liquidity.

   Example: Imagine a crowded market where you can easily buy and sell fruits without changing their prices much. That’s what improved liquidity does for Treasury securities.

How Can This Affect Stocks?

1. Lower Short-Term Interest Rates:

   So while Fed is not willing to cut rates, buying back treasury helps to cut the rates..

   • ‘Borrowing Costs: Lower short-term rates mean cheaper loans for companies. This can lead to higher profits and potentially higher stock prices.

   • Sector Performance: Sectors like real estate and utilities, which rely on borrowing, could benefit significantly.

   Example: If a listed company borrows money at lower rates, it saves on interest payments, boosting its profits and potentially its stock price.

2. Investor Sentiment:

   • Market Confidence: Stable bond markets can boost investor confidence. When investors feel secure, they’re more likely to invest in stocks, driving prices higher.

   Example: Think of it like a well-built bridge. If people trust the bridge, they’re more likely to cross it (invest in the market).

SOUND GOOD??? HERE IS MY CONCERN ~ THE YIELD CURVE

This are the latest interest rates and i want to bring your attention to the fact that the short term interest rates are higher than the long term ones!

This is not “normal” because typically if you lock in your money for a long term in banks or debts, they are suppose to pay you higher interest rates since they are locking in your money for longer term.

When investors are avoiding short term bonds and want to lock in money for longer term bonds, the interest rates for long term bonds drop. The reason is because since there is so much supply of money for the longer term, there is no need to pay such high interest rates.

This is known as the Inverted Yield Curve and based on historical data, an Inverted Yield Curve is always followed by a Recession!

Look at the chart below. It is a 10 year Minus 2 Year Treasury Yield chart.

So example if 10 years treasury is giving 5% and 2 years is giving 4%, then the chart will show 5% - 4% = 1%.

There are a few instance where it goes below the 0 line and becomes negative. This is because 10 Years yield is lower than 2 years yield.

For example, right now, based on the latest table above, we see that

10 Years = 4.548%

2 Years = 4.979%

So we will see the chart reflecting 4.548% - 4.979% = -0.431%

From the chart, you can see that based on historical data, there is a pattern.

1: Yield curve becomes inverted. 10 Years minus 2 years is negative. (We see chart going below 0)

2: Yield curve then become normal. 10 Years minus 2 years turns positive (We see chart turning up and goes above 0)

3: Recession (Grey Area)

This happened over and over again!

Currently, we are at point 1. But with Treasury Buy Back operation… it will go into point 2 where short term interest rates falling.

Why does Recession happen?

My theory is that the market always overreact. During an inverted yield curve period in point 1, investors are fearful. In fact inverted yield curve reflects the sentiment of investors showing that investors are wary. It becoming a reinforcing loop.

Investors are wary —> Inverted Yield Curve —> Investors see inverted yield curve and become wary.

But as Buffett said… be greedy when others are fearful. And we had followed this advice and made more than 40% this year in the market with a lot of uncommon opportunities where investors become overly pessimistic over great companies’ results like Amazon, Meta etc.

But but but… when interest falls and investors become "optimistic” and “greedy”, thats where we need to be “fearful”,

Thats where point 2 happens.

When yield curve becomes normal, not only does it seem good for the economy, this also sends excitement and optimism into the stock market. And typically, within near period, recession happens. (Point 3)

But this is just a theory, based on historical data… and Something we know in the market is that history does repeat itself…

How to Take Advantage of This Opportunity

1. Sector Focus:

   • Interest-Sensitive Sectors: Look at sectors that benefit from lower rates, like real estate, utilities, and consumer discretionary stocks. Lower mortgage rates can boost housing markets, benefiting real estate companies.

   • Diversify with Bonds: Consider adding Treasury securities to your portfolio for stability and steady income.

   Example: Adding a mix of stocks and bonds can make your investment portfolio like a balanced diet—healthy and resilient.

2. Monitor Economic Indicators:

   • Stay Informed: Keep an eye on economic data like GDP growth, inflation rates, and employment figures. These can provide clues about future market moves.

   Example: Think of these indicators as weather forecasts. They help you prepare and adjust your plans.

3. Use of Hedging Strategies:

   • Hedging Tools: Learn about options and other strategies to protect your investments from volatility. Covered calls and protective puts can be effective tools.

   Example: These strategies are like insurance policies—they protect you from unexpected market downturns.

In Conclusion

The Treasury buyback operation isn’t just a technical detail; it’s a strategic move that can impact the broader financial markets. For novice investors, this is a golden opportunity to understand market mechanics and refine your investment strategies.

By staying informed and proactive, you can turn these market changes to your advantage.

For more detailed information, you can refer to the U.S. Treasury’s official announcements​ (Treasury.gov)​​ (Treasury.gov)​.

If you have not, do join our telegram group (join here:https://t.me/nextlevelacad) for more discussions and exclusive zoom sessions and lets build wealth, give wealth together…. Next level!

Sean