US Treasury yields are rising – what does this mean for bitcoin price?

United States government bonds or Treasuries have a tremendous impact 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 attributable to the US dollar.

Assuming that the US government is in a worst-case scenario of eventually defaulting on its own debt, what will happen to the households, businesses and countries that hold those bonds? The lack of interest loan payments is likely to lead to a global shortage of the US dollar, which will have a cascading effect.

But, even if that scenario turns out to be successful, history shows us that cryptocurrencies can serve as a hedge during periods of uncertainty. For example, during the US-China trade war in May 2021, bitcoin significantly outperformed traditional wealth preservation assets. Bitcoin gained 47% between May 5 and May 31, 2021, while the Nasdaq Composite declined 8.7%.

Since the general public owns over $29 trillion in US Treasuries, they are considered the least risk averse in existence. Nevertheless, the price, or yield traded, of each of those government bonds will vary depending on the maturity of the contract. Assuming that there is no counterparty risk for this asset class, the most important pricing factor is expected inflation.

Let’s find out if the rising demand for US Treasuries will affect the price of bitcoin and ether.

Higher demand for government bonds leads to lower yields

If one believes that inflation will not be contained anytime soon, this investor may seek higher yields when trading in Treasuries. On the other hand, if the US government is actively devaluing its currency or additional inflation is expected, investors will seek refuge in US Treasuries, which will have lower yields.

Note how the 5-year Treasury yield reached 4.05% on June 22, its highest level in more than three months. The stir came as the US Consumer Price Index (CPI) for May came in at 4.0% on a year-on-year basis, the lowest increase since March 2021.

The 4.05% yield indicates that investors are not expecting inflation to drop below the central bank’s 2% target in the near future, but also shows confidence that the 9.1% peak CPI data from June 2022 is behind us. However, Treasury pricing doesn’t work that way because investors are willing to give up rewards in exchange for the safety of the lowest risk assets.

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 they could be severely constrained if a global recession becomes more likely.

The typical inverse correlation between bitcoin and US Treasury yields over the past 10 days has been invalidated, most likely because investors are desperate to protect themselves by buying government bonds, even when yields are lower than inflation expectations.

The S&P 500 index, which measures the US stock market, reached 4,430 on June 16, only 7.6% below its all-time high, which also explains the high yield. While investors typically seek rare and inflation-protected assets ahead of turbulent times, their appetite for extreme equity valuations is limited.

Connected: Bitcoin price data shows that bulls will be able to hold $30K as support this time

Recession risks could distort yield data

The only sure thing at this point is that investors’ expectations of a recession are becoming more apparent. In addition to Treasury yields, the US Conference Board’s leading indicators declined for 14 consecutive months, as described by Charlie Bilello:

The Conference Board’s leading economic index declined for the 14th consecutive month in May.

“We estimate that the US economy will contract over the period from Q3 2023 to Q1 2024. The recession will likely be driven by continued tightening in monetary policy and lower government spending.” pic.twitter.com/wQfy8a3DVq

— Charlie Bilello (@charliebilello) 23 June 2023

As a result, those betting that Bitcoin will soon make a comeback after breaking away from its recent inverse correlation to US Treasury yields may be disappointed. The data confirms that government bond yields are higher than normal due to rising expectations of a recession and economic crisis.