2023-06-25 20:28:46
US Government, or Treasury, bonds have enormous influence on all trading markets, including Bitcoin (BTC) y Ether (ETH). In this sense, the calculation of risk in finance is relative, so that all loans, mortgages and even cryptocurrency derivatives depend on the cost of capital attributed to US dollars.
Assuming the worst case scenario, in which the United States government ended up defaulting on its own debtWhat would happen to the families, companies and countries holding these bonds? Failure to pay interest on the debt would likely lead to a global shortage of US dollars, triggering a cascading effect.
But even if that scenario does come to fruition, history shows us that cryptocurrencies can function as a hedge during periods of uncertainty. For example, Bitcoin vastly outperformed traditional wealth preservation assets during the US-China trade war in May 2021. Bitcoin gained 47% between May 5-31, 2021, while the Nasdaq Composite lost 8.7%.
Since the general public holds over $29 trillion in the US Treasury, they are considered to be the lowest risk out there. Even so, the price of each of these government bonds, or the negotiated yield, will vary depending on the maturity of the contract. Assuming there is no counterparty risk for this asset class, the most important pricing factor is the expectation of inflation.
Let’s analyze whether the price of Bitcoin and Ether will be affected by the increasing demand for US Treasury bonds.
Higher Demand for Government Debt Pushes Yields Down
If one believes that inflation will not be contained in the short term, this investor is likely to look for a higher yield when trading with the Treasury. On the other hand, if the US government is actively devaluing its currency or there is an expectation of additional inflation, investors will tend to seek refuge in US Treasuries, leading to lower yields.
5-year US government bond yield. Source: TradingView
Notice how the 5-year Treasury yield hit 4.05% on June 22, the highest level in over three months. This move came as the US consumer price index (CPI) for May stood at 4% year-on-year, the lowest growth since March 2021.
A yield of 4.05% indicates that investors do not expect inflation to fall below the central bank’s 2% target anytime soon, but also shows confidence that the June 2022 CPI peak of 9.1% is behind us. . However, that is not how Treasury prices work, because investors are willing to forgo rewards for the security of owning the lowest risk asset.
US Treasury yields are a great tool for comparing other countries and corporate debt, but not in absolute terms. These government bonds will reflect inflation expectations, but may be severely constrained if a global recession becomes more likely.
5-year US government bond yield against Bitcoin/USD (orange). Source: TradingView
The typical inverse correlation between Bitcoin and the US Treasury yield has been invalidated in the last 10 days, most likely because investors are desperately buying government bonds for safety, regardless of whether the yield is below inflation expectations.
The S&P 500 index, which measures the US stock market, reached 4,430 points on June 16, just 7.6% below its all-time high, which also explains the higher returns. While investors often look for scarce, inflation-protected assets ahead of turbulent times, their appetite for excessive equity valuations is limited.
Recession risks could have distorted performance data
The only certain thing for the moment is that investors’ expectations of a recession are becoming more and more evident. Aside from the Treasury yield, the US Conference Board’s leading indicators declined for 14 consecutive months, as Charlie Bilello describes:
The Conference Board’s Leading Economic Index declined in May for the 14th month in a row.
“We project that the US economy will contract over the Q3 2023 to Q1 2024 period. The recession likely will be due to continued tightness in monetary policy and lower government spending.”… pic.twitter.com/wQfy8a3DVq
— Charlie Bilello (@charliebilello) June 23, 2023
Consequently, those who are betting that Bitcoin’s recent decoupling from the inverse correlation of US Treasury yields will quickly reverse might be disappointed. Data confirms that public debt yields are higher than normal due to growing expectations of recession and economic crisis to come.
This article does not contain investment advice or recommendations. All investing and trading involves risk, so readers should do their own research before making a decision.
This article is for general informational purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the entire amount invested may be lost. The services or products offered are not directed or accessible to investors in Spain.
#price #Bitcoin