Lesson 3
Connection 3-4: Rates & Credit
When real yield (REAL_YIELD_2Y)s rise sharply, reduce duration exposure (growth stocks, BTC (BTCUSD)). When credit spread (BAMLH0A0HYM2)s widen, reduce equity risk even if stocks haven't fallen yet.
📊 Indicators mentioned in this lesson (click for details):
Connection 3: Real Yield (REAL_YIELD_2Y)s → Duration Assets
Real Yield (REAL_YIELD_2Y) = Nominal Yield - Inflation Expectations
Real yields are the 'true cost' of money. They affect long-duration assets: growth stocks, gold, crypto, bonds.
Thresholds:
- Real yields negative: Free money, duration assets thrive
- Real yields 0-1%: Neutral
- Real yields >1.5%: Expensive money, duration assets suffer
- Rate of change matters: Rising real yield (REAL_YIELD_2Y)s = headwind
The Targets:
- High P/E growth stocks (future cash flows discounted harder)
- Gold (GLD)/BTC (BTCUSD) (non-yielding assets face opportunity cost)
- Long-term bonds (compete with rising real yield (REAL_YIELD_2Y)s)
Connection 4: Credit Spreads → Equity Risk
HY spread (BAMLH0A0HYM2)s measure fear in credit markets. Credit investors are often smarter/earlier than equity investors.
Thresholds:
- HY < 350 bps: Complacency (vulnerable to shocks)
- HY 350-500 bps: Normal risk pricing
- HY > 500 bps: Fear, stress emerging
- HY > 800 bps: Crisis
The Lead:
Credit spreads typically lead equity by 2-6 weeks:
- Spreads widening + stocks flat = stocks will fall
- Spreads tightening + stocks falling = stocks will recover
Divergences resolve toward credit's signal.
Check your understanding
Lesson Quiz
Quiz Check
Why do high real yield (REAL_YIELD_2Y)s hurt long-duration assets specifically?
Quiz Check
Real yields just went from 0% to +2%. Credit spreads are still tight. What should you expect?