UNITED STATES / RUSSIA – Few of the stock speculators could sleep in the last days and eat peacefully. The reason is obvious: at the actions and in the indices there was a real big collapse.

After 15 months of “Trump Rally”, almost continuous growth with a minimum amplitude of fluctuations, forgotten volatility returned to the markets. All exchange instruments, as if released to freedom, flew up and down like a swing. The S & P500 index, which at the end of January was as close as never before to the height of 3 thousand, not reaching it only 125 units, collapsed instead almost to 2500.

The index of Nasdaq technology companies from the peak of 7036 dropped in the moment by more than 850 units. Late in the evening, Friday purchases partially returned to the market, and indices have now refunded up to 40% of the losses incurred. Has the market already found a firm ground under your feet and by what grounds can you judge this, says Peter- Pushkarev, the chief analyst of the TeleTrade Group of Companies.

In the active stage of the collapse, and then during the bounces, it was clearly visible “tug-of-war” between stock assets (shares, indices), on the one hand, and instruments with guaranteed yields – first of all bonds, or, as they are often called, or “treasurers” of the United States.

The yield of the “treasurer” market, of course, is much lower and than any possible future profits in the stock markets, and than the income already collected there for many months “rally”. Not to mention individual papers that gave the maximum profit, only the average index of the broad S & P500 market since the victory of Trump in elections grew by 34%, and the technological sector of Nasdaq rose almost 50%.

Compared with these figures, the maximum yield on the reference treasury 10-year securities of the US, of course, is much smaller, but it is a guaranteed tool without risks, government obligations, a completely different topic. And if in September they were given from 2.05% to 2.35%, and now at the moment the coupon yield fluctuates within 2.83-2.88% per annum, then for the conservative debt market this difference is more than significant and reflects important processes in both currencies and other market segments, including in the stock markets.

The yield of “treasurers” has so significantly risen since the fall because of the obvious excess of supply over demand. The US posted a record amount of debt in October and November and, by the way, will continue to do it on an even larger scale and in 2018. The offer is great, and the demand was not very much, especially while it was possible to invest confidently in the stock rally. Yes, and future interest rate increases by the US Federal Reserve, albeit slow, promise even more profitability in the near future. Hence the still continuing trend in the profitability of the “10-Letok”.

Money and generally not too much sought in fixed income tools, and even more so, most large investors did not want to particularly increase their positions specifically on the US debt market, which has already been invested a lot in previous years. Because of this, and because of the inflaming trade wars, the foreign exchange market also experienced a serious “aversion” to the dollar, and the dollar declined from the fall and to the euro, to the British, and across virtually the spectrum of other currencies – and also accelerating this weakening after New Year.

The collapse in the stock exchanges changed the situation radically, the funds began to record profits in mass, while it is definitely there, and still not small – and rushed to the “cash”. A “cache” in the understanding of the funds is still something that brings at least a small but guaranteed interest income – hence, primarily tools of the debt market. Demand for “treasurers” on the first day of the stock-exchange collapse immediately dropped the yield of 10-year bonds by more than 0.2% to 2.65%. But as the majority of the market is still inclined for objective reasons to consider the current decline in the stock still as a strong correction, after which it will be necessary to again buy stocks, indexes and ETF, then the outcome of money to the debt market was bright, but not massive. In the following days, the demand for “treasurers” reappeared – and in the moments of new recessions on the stock immediately lowered the yield and in the debt market – at the same time, due to purchases of US debt denominated in dollars, the dollar was greatly oversold in the moment. And just as surely the demand for debt subsided with every new attempt by the exchanges to rise: it was so first on the last Tuesday of February 6, and then on the evening of Friday the 9th and on Monday the 12th of February.

An interesting feature of the behavioral correlation in the area of ​​the key median mark 2.85% on the yield of 10-year notes was noted on the charts by Bloomberg experts. Almost every time the confident crossing of the yield curve of this 2.85% mark upwards or downwards signals these days, respectively – about a new wave of the stock exchanges’ fall, when the yield vector of the treasuries is pointing down – and vice versa, about the possibility of a faster or stronger recovery on exchanges if the yield “Treasurer” passes the same mark of 2.85% upward (see graph). This line of “watershed” on the profitability chart of “treasurers”, it seems, can be used as an indicator, whether the money will go to dollars or on a particular day, attempts to weaken the US currency will resume.

However, by and large, for the yields on the debt market to seriously go down and unfold a long trend for growth, it takes more than just one week of stock correction after 15 months of growth – and, in general, the correction is still quite normal in percentage terms.

As long as the capital rushes between the expectations of the next portion of the high profit at the next round of the exchange’s upswing, when the correction ends, on the one hand, and the desire to simply keep in bonds as in an instrument with a low but guaranteed return, it is curious to look at the estimated ratios between the possible earnings on shares and indices, and between fixed yields in bonds. This is the so-called Fed model, which allows to estimate the approximate scale of the fall of exchanges, if it does resume, and at what values ​​of the stock indices investors again with a much greater probability are already deciding to buy.

New York expert Lu Wang from Bloomberg estimates, for example, that during the previous strong exchange corrections, in particular in January 2016, when the markets of China fell – the interest to new active purchases of shares on the “bottom” arose when the potential profit from such purchases in 15.5 times higher than the guaranteed yield on bonds. At the peak of the market until the collapse in late January, this ratio reached 20 or more, and in the course of the correction, it was lowered only slightly below 17.

Not asserting that the stock exchanges will continue to fall and that the indices will certainly update the bottoms, Lu Wang notes that if the sentiment strengthens to continue closing long positions and decline, and at the current yield level of American treasurers, a potential “bottom” on the S & P500 index could be formed at the level of 2417, which is more than 200 units below the current values ​​of the index after its recovery from last week’s lows.