The Impact of U.S. Treasury Demand on Bitcoin and Ether Prices
The 5-Year U.S. Treasury Yield Reaches 3-Month High: A Different Correlation with Bitcoin?
United States Government bonds, also known as Treasurys, hold significant influence over various tradeable markets, including cryptocurrencies like Bitcoin (BTC) and Ether (ETH). Understanding the relative nature of risk calculation in finance is crucial since loans, mortgages, and even cryptocurrency derivatives rely on the cost of capital associated with U.S. dollars.
In a worst-case scenario where the U.S. government defaults on its debt, the repercussions would extend to families, businesses, and countries holding these bonds. The absence of interest debt payments could lead to a global shortage of U.S. dollars, setting off a cascading effect.
However, even if such a scenario were to materialize, historical evidence suggests that cryptocurrencies can act as a hedge during periods of uncertainty. For example, during the U.S.-China trade war in May 2021, Bitcoin significantly outperformed traditional wealth preservation assets. Between May 5 and May 31, 2021, Bitcoin witnessed a 47% increase in value, while the Nasdaq Composite experienced an 8.7% decline.
Considering that the general public possesses over $29 trillion in U.S. Treasurys, these bonds are perceived as the lowest risk investment. Nevertheless, the price and yield of each government bond vary based on its contract maturity. Assuming there is no counterparty risk associated with this asset class, the most significant pricing factor becomes inflation expectations.
Let us delve into whether the demand for U.S. Treasurys will impact the prices of Bitcoin and Ether.
The Inverse Relationship: Higher Demand for Government Bonds Leads to Lower Yields
When an investor believes that inflation will persist without restraint, they are likely to seek higher yields when trading Treasury bonds. Conversely, if the U.S. government actively devalues its currency or if additional inflation is expected, investors tend to find refuge in U.S. Treasurys, resulting in lower yields.
The 5-year U.S. Treasury yield surged to 4.05% on June 22, its highest level in over three months. This increase coincided with the release of the U.S. Consumer Price Index (CPI) for May, which showed a year-over-year growth of 4.0%, the lowest since March 2021.
A yield of 4.05% indicates that investors anticipate inflation to remain above the central bank's 2% target in the near future. It also reflects confidence that the peak CPI data of 9.1% in June 2022 is behind us. However, Treasury pricing differs as investors are willing to sacrifice higher rewards for the security offered by the lowest-risk asset.
U.S. Treasury yields play a vital role in shaping the global economy, serving as benchmarks for assessing the value of other countries' debt and corporate bonds. It's important to note that Treasury yields are relative measures, not absolute indicators.
The relationship between U.S. Treasury yields and cryptocurrencies like Bitcoin and Ether is complex. When Treasury yields rise, investors seeking security may shift funds to government bonds, potentially exerting downward pressure on Bitcoin prices. Conversely, declining Treasury yields may attract interest in Bitcoin as investors pursue higher returns.
Ether, with its distinct principles and role in the Ethereum ecosystem, may experience less pronounced effects from U.S. Treasury yield fluctuations compared to Bitcoin. Factors such as Ethereum's adoption and network growth have a more substantial influence on Ether's price.
The conventional inverse relationship between Bitcoin and the U.S. Treasury yield has been disrupted in the recent 10 days. This deviation is likely due to investors actively purchasing government bonds for their perceived safety, regardless of the yield being lower than expected inflation.
On June 16, the S&P 500 index, a gauge of the U.S. stock market, reached 4,430, merely 7.6% below its record high. This surge in yields can be attributed to investors' reluctance to pursue excessively high equity valuations and their preference for scarce assets that offer protection against inflation during uncertain times.
In summary, the usual correlation between Bitcoin and the U.S. Treasury yield has been overridden in the past 10 days, primarily driven by investors' pursuit of safety through government bonds, even with lower yields. The relatively high levels of the S&P 500 index indicate a cautious approach towards equity valuations.
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Recession risks could have distorted the yield data
The traditional inverse relationship between Bitcoin and the U.S. Treasury yield has been disrupted in the past 10 days. This deviation is likely a result of investors actively seeking the safety of government bonds, regardless of the lower yields compared to expected inflation.
On June 16, the S&P 500 index, a key indicator of the U.S. stock market, reached 4,430, only 7.6% below its all-time high. This increase in yields can be attributed to investors' hesitancy in pursuing overvalued equities and their preference for scarce assets that provide protection against inflation during times of uncertainty.
In conclusion, the usual correlation between Bitcoin and the U.S. Treasury yield has been overridden recently, driven by investors' focus on the safety of government bonds, even with lower yields. The relatively high levels of the S&P 500 index indicate a cautious approach towards equity valuations.