Typically, higher borrowing costs are detrimental to risk assets, according to one research organisation.
Just when you believe crypto-native advances have stabilised the market, macro issues threaten to make the ground shaky once more.
Specifically, the rising inflation-adjusted and nominal government bond yields in the United States and elsewhere may complicate matters for risk assets such as bitcoin and traditional store of value assets such as gold.
The 10-year real or inflation-adjusted Treasury yield in the United States increased to -0.38 percent this week, the highest level since early June 2020, according to the Federal Reserve Bank of St. Louis. While the yield remains negative, it has increased by 66 basis points in four weeks to a near-90 degree level.
“Another significant upward leg for gold and bitcoin is anticipated to come when real yields stabilise. We are not yet there “True Insights’ founder and research head, Jeroen Blokland, tweeted.
According to Kaiko Research’s weekly newsletter, “usually, rising borrowing costs damage risk assets such as technology stocks and cryptocurrency, which appear less appealing to investors than safe-haven bonds.”
Bitcoin signifies a variety of things to a wide variety of people. Bitcoin, for crypto enthusiasts, is a digital counterpart of gold and a viable alternative to the US dollar, the world’s reserve currency. Traditional market investors, on the other hand, largely view it as a risk-on asset akin to equities. This is demonstrated by the index’s increasing correlation with the S&P 500 and technology stocks.
The graphic above demonstrates that bitcoin and the actual yield do not exhibit a consistent link. However, bitcoin’s November peak occurred at the same time as the 10-year real yield reached a low. Perhaps macro traders who accumulated bitcoin as a store of wealth in the aftermath of March 2020’s coronavirus-induced crash cut exposure in response to the real yield increase, as one analyst warned last year.
Fed hawkishness and a continuing rise in the nominal 10-year yield have resulted in a substantial increase in the real yield.
According to the charting platform TradingView, the nominal yield was at a three-year high of 2.6 percent at press time, representing a 40 basis point increase since the Fed hiked rates on March 16. The yield has risen more than 100 basis points year to far, and the gain is causing concern among obsevers.
“The 10-year Treasury yield continues to increase in Asian trading. There have been numerous false alarms in the bond market over the years, but this is beginning to resemble the long-feared break-out “Bloomberg’s senior editor for markets, John Authers, tweeted.
When asked when the 10-year yield will become a source of concern for risk assets, Authers responded, “Right now, if not a little time ago…”
“Risk aversion is progressively increasing, and the dollar index has reached its highest level of the year,” Griffin Ardern, a volatility trader at crypto-asset management firm Blofin, explained. “There is a possibility that the liquidity shrinkage is intensifying. Details of the March FOMC meeting will be announced at 2:00 p.m. EST.”
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.