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Why 2-year Treasury yields indicate a ‘huge change in non-risky asset sentiment’: Strategist

Interactive Brokers chief strategist Steve Sosnick joins Yahoo Finance Live to discuss stock performance ahead of the Fed’s rate hike announcement, crypto companies pausing withdrawals, Treasury yields, and the outlook for cryptocurrency.

Video Transcript

BRIAN CHEUNG: Well, let's get a little bit more perspective on the market selloff with Interactive Brokers chief strategist Steve Sosnick. Obviously, Bitcoin's falling, but really it's-- everything, everywhere, all at once is a joke that I saw on Twitter this morning. We're seeing just red everywhere. What do you make of the market action today? It's interesting that this is in reaction, seemingly, to an inflation report that we got at 8:30 on Friday. What do you think is up with this second day digesting of that news today?

STEVE SOSNICK: Well, good morning, Brian. I wish we were talking under better circumstances. The way I see it is the key to me is the reaction in two-year yields. And it underlies so much of the stuff that you and Akiko were talking about in the intro. We're-- two-year note yields, US Treasury two-year note yields are among the safest assets out there. They're up 40 basis points in less than two trading sessions. That's insane.

Now, granted, the rate has been moving up from 1% to now over 3%. But what that is telling me is there's this huge change in risk-- in non-risky asset sentiment. Well, if people are ditching their non-risky assets, such as two-year notes, well, what chance do risky assets have as a result? And that's where I think really the crux of this reaction over the last two days comes from.

AKIKO FUJITA: How much of that shift in sentiment is warranted, do you think, Steve?

STEVE SOSNICK: As with many things, I think you have a bit of an overreaction, but I do think it is warranted. I mean, what we learned on-- on Friday, I think going into the number, there was this hope-- and I think it was more of a hope than a true expectation-- that we were seeing peak inflation. And that was dashed. The other part was we had a record low in preliminary Michigan Consumer Sentiment.

So if you want to put those two together, that is stagflation in a nutshell, people not spending money and less purchasing power with which to spend it. And I think that really got us moving on the downside. Plus, this is going to be a tough week. You know, as Brian certainly knows, we have the Fed meeting on Wednesday and we have quarterly expiration on Friday. There's a lot of stuff converging all in a very short period of time.

BRIAN CHEUNG: Yeah, I certainly do know that, Steve. But to get back to your earlier point, today feels different than the other selloffs that we've seen from the perspective of what you just noticed, where you're not seeing bond yields go down. And a lot of that is because of just the Fed's role in all of this. But look, gold is down, Bitcoin is down, oil is down, the energy sector is down today. Where are people going? Are they just going to cash right now?

STEVE SOSNICK: I'm afraid yes. And that's partially why Celsius and Binance are having-- are halting withdrawals. That's people-- that's people trying to get their money out and go to cash. You know, this-- there's really no place to hide. Gold is typically considered a safe haven, but remember, gold, as often as it acts as an inflation hedge, it also acts as the anti-dollar.

So people are moving into US dollars. DXY is near-- is near a record high. So that's putting the pressure on gold. There's really-- there are certain days where it's very hard to find a place to hide, and especially, again, as I noted, when it's the safe assets that are making it impossible to find a place to hide. Where are you going to go? And that's, I think, the mentality. That's why I think we're seeing what I'm just going to call a get me out day.

AKIKO FUJITA: Steve, I'm curious what you make of what we've been seeing in the crypto space. It's certainly not just today. Today the story is Celsius, but a few weeks ago, it was Terra. I mean, it feels like a bit of a reckoning, potentially, maybe that's happening. We've heard of these warnings of a crypto winter coming. What do you make of everything that's been shaking down in this space?

STEVE SOSNICK: I think reckoning is a fine word. Unraveling, to a certain extent. You know, when you think about the amount of money that flowed into crypto, and it was-- and I'm sorry to say this, but it was purely speculative. And there's nothing wrong with speculation in and of itself, but you have to realize that these are assets without much of a use case right now. And this is coming from someone who firmly believes that there is a phenomenal use case for blockchain. We just haven't really figured it out yet.

But it's not clear to me what the use case is for crypto at the moment, at least in its current form. And so when you start to see that, people-- it was a big momentum trade. People jumped in because the momentum was great and they were-- and there was money to be made, and many people did. But on the flip side, momentum-- momentum gets you in both directions. And this is what I think we're seeing today, is the inverse of the positive momentum trade that drove so many people into crypto, or attracted so many people to crypto, is probably the better way to put it.

BRIAN CHEUNG: Steve, we've seen a lot of comparisons to what we're experiencing now to the 1970s, when you look at the macro picture. As far as markets, I've heard comparisons to the dotcom bubble. Do you think there's anything that's comparable to what we're seeing right now? Because to me, what appears very unique is just the rapid pace of everything. Not just inflation, but also the selloffs that we're seeing and then the Fed's reaction function.

STEVE SOSNICK: Well, I've had many pieces out where I've compared the current environment to late '90s or early 2000s, but now throw a layer of the mid-70s onto this. I-- quite frankly, that's a frightening combination, and I think that's kind of what the market is thinking of in its worst-case scenario, is stagflation on top of a deflating asset bubble. That is not a pretty picture. And you know, it's going to be something we're going to have to deal with.

The question is, as you mentioned, things seem to be happening very quickly. That is the nature of markets now. We've gotten more efficient and better, I would argue, at transmitting sentiment into price changes. But on the flip side, that means that we see these sharp, sharp moves. And so, you know, I wish I could say something more encouraging than mid-70s mixed with-- mixed with the deflating of the internet bubble, but quite honestly, that is a fairly apt analogy, unfortunately.

AKIKO FUJITA: Finally, Steve, we've heard so many analysts say that now is not the time to panic, that don't necessarily be checking your portfolio every day. But if you're a long-term investor, is this a good opportunity to add to your portfolio?

STEVE SOSNICK: Yes, if you're disciplined about it and if you're going about it the right way. If you're reflexively buying the dip, I've been very clear in the stuff I've been saying and writing over the last few weeks, don't just reflexively buy the dip. That's not a smart move. But I did just recently publish an article saying that growth stocks have all become value stocks. We're all value investors now.

And when you get in markets like this, there will be stocks that have value to them that get thrown out and get to trade at bargain prices. It's not easy to find them, but it requires discipline and it requires a mindset that is patient, and it requires you to have a bit of a risk tolerance. But yes, Akiko, you're right, there are opportunities out there. You just have to think of them as that-- you just have to think of, even your favorite growth stocks, are they value stocks now? If so, then that probably is a good time to be looking at them.

BRIAN CHEUNG: Well I mean, even to that point, even regular value stocks like the banks right now having a really tough time. No reprieve anywhere. Interactive Brokers chief-- Interactive Brokers chief strategist, sorry-- Steve Sosnick, thanks so much for stopping by. Appreciate it.