U.S. bankruptcies, a Bitcoin ETF, and the bond crash

Hello Folks,

Happy Tuesday! Let’s dive into the financial news that we are covering today.

U.S. Bankruptcies are Piling Up

Rite Aid, a pharmacy giant, just filed for bankruptcy due to its unsustainable debt load, which currently stands at $4 billion.

Founded in 1962, Rite Aid employs close to 50k people and has more than 2,000 store locations in the U.S. To reduce interest expenses and boost its liquidity position, Ride Aid shut down 200 stores in the last two years while undergoing debt swaps and pay-downs.

After more than a decade of access to cheap debt, interest rate hikes since 2022 have led to several bankruptcies in the U.S. These include brands such as Bed Bath & Beyond and VICE. The total amount of distressed debt in the U.S. has surged by 400% since 2021 to $242 billion.

Crash And Bond: The Sell-off In Long-Term Treasuries Continues

The Fed’s most aggressive rate-hiking run in decades has resulted in huge losses in the Treasury market over the past two years. US government bonds with maturities of ten years or longer, which are highly sensitive to changing interest rates, have now declined by a stunning 46% since their peak in March 2020. That’s just shy of the 49% drop in US stocks following the burst of the dot-com bubble at the start of the century.

The drop in Treasuries today is also far steeper than the average 39% fall seen in all US stock bear markets since the 1970s and easily surpasses the 25% slip in the S&P 500 last year when the Fed started hiking interest rates from near zero to more than 5% today.

It’s worth bearing in mind that the longer the maturity of the security, the greater its sensitivity to interest rate changes. Longer-dated bonds are the ones you want to own when rates are falling, but they take a beating when interest rates are rising rapidly.

Of course, there is a silver lining in the Treasury market: while the prices of existing bonds are dropping because of today’s climbing rates, newly issued bonds with higher yields are offering long-term investors the chance to grab bigger returns over time.

Will a Bitcoin ETF Launch In 2023?

Bitcoin prices are up 5% in the last 24 hours on optimism that a Bitcoin ETF will launch within the next six months. So, why is an ETF such a big deal?

According to Morgan Street Capital, a hedge fund, a spot Bitcoin ETF would attract $300 billion in capital from investors. At the present price, it amounts to 10 million BTC.

Bitcoin is deflationary in nature, and the total amount of BTC available is limited to 21 million. So, a spike in demand should drive BTC prices higher, resulting in higher adoption rates and market participation of the digital asset.

The first gold ETF was launched in 2004, and the prices of the yellow metal increased almost 400% in the next decade. Will Bitcoin follow suit?

Headlines You Can’t Miss!

The worst may be over for China, says FTSE chief

What should you expect from Goldman Sachs in Q3?

The iPhone loses its top spot in China to Huawei

Interest rates will remain elevated, say economists

FTX customers could get $9B shortfall claim payout by mid-2024

Chart of the Day

U.S. tech giants added $2.4 trillion to their market capitalizations in a year defined by the hype around generative artificial intelligence, according to a new report from venture capital firm Accel.

Accel’s Euroscape index, which includes massive cloud and software-as-a-service (SaaS) names such as Salesforce, Palantir, and Unity, rose 29% in the year to date.

Last year, the picture for cloud and SaaS was grim. Companies saw $1.6 trillion wiped off their value as investors rotated out of high-growth tech stocks. Now, there are signs the pressure is easing.

The tech-heavy Nasdaq Composite returned to 80% of its all-time high within 18 months, marking a faster bounce back than after the dotcom bust in the 1990s.

AI was the primary technology driving the performance of cloud and SaaS in 2023, and it’s not difficult to see why.

The world has been abuzz with talk about generative AI tools like OpenAI’s ChatGPT, Google’s Bard, and Anthropic’s Claude.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell assets or make financial decisions. Please be careful and do your own research.