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Rising U.S. Treasury Yields and the Potential Impact on Bitcoin
A three-month peak in the five-year U.S. Treasury yield might not follow the typically inverse relationship with Bitcoin's price.
U.S. government bonds, or Treasurys, wield considerable power across all tradable markets, Bitcoin and Ether included. Considering that risk assessment in finance is relative, every aspect, from loans, mortgages, to cryptocurrency derivatives, hinges on the U.S. dollars' capital cost.
Let's imagine the worst-case scenario - the U.S. government defaults on its debt. What becomes of the families, enterprises, and nations holding those bonds? The probable consequence would be a global U.S. dollar scarcity due to unpaid interest on the debt, leading to a domino effect.
Nonetheless, even if this eventuality transpires, cryptocurrencies have proven to be a hedge during periods of instability. For example, Bitcoin significantly outperformed conventional wealth conservation assets during the U.S.-China trade conflict in May 2021. Bitcoin's value surged by 47% between May 5 and May 31 that year, while the Nasdaq Composite experienced an 8.7% decline.
U.S. Treasury and its Influence on Inflation Expectations
Despite the U.S. public holding over $29 trillion in the U.S. Treasury, regarded as the lowest-risk financial product in existence, the price, or the yield traded, of each government bond varies according to contract maturity. Assuming no counterparty risk for this asset class, inflation expectation becomes the pivotal pricing factor.
So, how could the growing demand for U.S. Treasurys potentially impact Bitcoin's and Ether's price?
Government Bonds Demand Versus Yield Dynamics
An investor who doesn't foresee inflation being curbed soon would likely demand a higher yield when trading the Treasury. Conversely, if the U.S. government is actively depreciating its currency or if additional inflation is expected, investors tend to flock to U.S. Treasurys, resulting in lower yields.
The five-year Treasury yield hit 4.05% on June 22, its highest in over three months, amid a 4.0% year-on-year increase in the U.S. Consumer Price Index for May - the lowest inflation growth since March 2021.
The 4.05% yield suggests that investors don't anticipate inflation dropping below the central bank's 2% target soon. However, it also shows faith that the peak 9.1% CPI data from June 2022 is in the past. Still, Treasury pricing doesn't work this way; investors are willing to forgo gains for the security of owning the lowest-risk asset.
U.S. Treasury yields serve as an excellent benchmark for comparing other countries and corporate debt, though not in absolute terms. While government bonds mirror inflation expectations, they may be severely limited if a global recession seems increasingly probable.
Deviation in Bitcoin and U.S. Treasury Yield Correlation
In the past ten days, the customary inverse correlation between Bitcoin and the U.S. Treasury yield has been disrupted, likely due to investors buying government bonds for their safety, irrespective of the yield being below inflation expectations.
The S&P 500 index reached 4,430 on June 16, just 7.6% shy of its all-time high, contributing to the higher yields. While investors generally opt for scarce and inflation-protected assets in turbulent times, they have a limited appetite for excessive equity valuations.
Yield Data Distortion Due to Recession Risks
Currently, there's growing evidence of investors' recession expectations. Beyond the Treasury's yield, the U.S. Conference Board's leading indicators have decreased for 14 straight months.
Therefore, those hoping that Bitcoin's recent disconnection from the U.S. Treasury's inverse yield correlation will quickly revert might end up disappointed. The data indicates that government bond yields are higher than usual due to increased anticipation of a looming recession and economic crisis.
