United States government bonds, or Treasury bonds, have tremendous influence on all tradable markets, including Bitcoin (BTC) and ether (ETH). In that sense, the calculation of risk in finance is relative, so every loan, mortgage, and even cryptocurrency derivative depends on the cost of capital attributed to US dollars.
Assuming the worst case scenario of the The US government eventually defaults on its own debtWhat about the families, companies and countries that have those 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 comes 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 and 31, 2021, while the Nasdaq Composite lost 8.7%.
Since the general public owns more than $29 trillion in the US Treasury, it is considered the lowest risk out there. Still, the price of each of those government bonds, or the traded yield, will vary depending on the contract's maturity. Assuming there is no counterparty risk for this asset class, the most important pricing factor is the expectation of inflation.
Let's explore if the price of Bitcoin and Ether will be affected by the increasing demand for US Treasuries.
Higher demand for government bonds leads to lower yields
If one believes that inflation will not be restrained anytime soon, this investor is likely to look for a higher yield when trading 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.
Notice how the 5-year Treasury yield hit 4.05% on June 22, the highest level in more than three months. This move occurred as the US Consumer Price Index (CPI) for May came in at 4.0% year-over-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 June's CPI record of 9.1% of 2022 have been left behind. However, that is not how Treasury prices work because investors are willing to forego 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.
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 expectations. of inflation.
The S&P 500 index, which measures the US stock market, reached 4,430 on June 16, just 7.6% below its all-time high, which also explains the higher returns. While investors typically look for scarce, inflation-protected assets ahead of turbulent times, their appetite for excessive stock valuations is limited.
Related: Bitcoin Price Data Suggests Bulls Will Manage To Hold $30K As Support This Time
Recession risks could have distorted performance data
The only sure thing at the moment is that investor expectations of a recession are becoming more apparent. In addition to the Treasury yield, the US Conference Board's leading indicators declined for 14 straight months, as Charlie Bilello describes:
The Conference Board's leading economic index declined in May for the 14th straight month.
"We project that the US economy will contract over the period from the third quarter of 2023 to the first quarter of 2024. The downturn is likely due to the continued tightness of monetary policy and lower government spending."... pic.twitter.com/wQfy8a3DVq
โCharlie Billello (@charliebilello) June 23, 2023
Consequently, those betting that Bitcoin's recent decoupling from the US Treasury yield inverse correlation will quickly reverse might be disappointed. The data confirms that government bond yields are higher than normal due to heightened expectations of a recession and economic crisis ahead.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
This article is for general information 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 those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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