United States Treasury Bonds or Treasury Bonds have a tremendous impact on all tradable markets including Bitcoin (BTC) and Ether (ETH). In this sense, the calculation of risk in finance is relative, so all loans, mortgages and even cryptocurrency derivatives depend on the cost of capital attributed to the US dollar.
Suppose, in the worst case scenario, the US government would no longer be able to service its own debt. What then happens to the families, companies and countries that hold these bonds? The lack of interest payments would likely lead to a global tightening of the US dollar, triggering a cascading effect.
But even if this scenario becomes a reality, history shows us that cryptocurrencies can act as a hedge in times 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 lost 8.7%.
Since the general public owns more than $29 trillion in US Treasury bonds, they are considered the least risk there is. Nevertheless, the price of each of these government bonds or the traded yield varies depending on the contract period. Assuming there is no counterparty risk for this asset class, inflation expectations are the most important price driver.
Let’s examine whether the price of Bitcoin and Ether will be affected by the growing demand for US Treasury bonds.
Higher demand for government bonds leads to lower yields
Assuming inflation isn’t curbed anytime soon, this investor will likely be looking for a higher yield when trading government bonds. On the other hand, if the US government is actively devaluing its currency or additional inflation is expected, investors will tend to seek refuge in US Treasuries, resulting in lower yields.
Yield on 5-year US Treasury bonds. Source: TradingView
Note that the 5-year government bond yield hit 4.05% on June 22, its highest level in more than three months. The move came as the U.S. Consumer Price Index (CPI) came in at 4.0% yoy in May, the slowest growth since March 2021.
A return of 4.05% suggests that investors do not expect inflation to fall below the central bank’s 2% target any time soon, but it also shows confidence that CPI peaks of 9, 1% from June 2022 are behind us. That’s not how government bond pricing works, however, as investors are willing to trade rewards for the security of owning the lowest-risk asset.
US Treasury yields are a great tool for comparing other countries and corporate bonds, but not in absolute terms. These government bonds will reflect inflation expectations but could be severely curtailed if a global recession becomes more likely.
US 5-year Treasury yield vs. Bitcoin/USD (orange). Source: TradingView
The typical inverse correlation between Bitcoin and US Treasury yields has been debunked over the past 10 days, most likely due to investors desperately buying Treasuries for safety despite the yield being below inflation expectations.
The S&P 500 index, which measures the US stock market, hit 4,430 points on June 16, down just 7.6% from its all-time high, which also explains the higher yields. While investors typically look for scarce and inflation-protected assets ahead of turbulent times, their appetite for inflated stock valuations is limited.
Related: Bitcoin price data suggests that the bulls will manage to hold $30,000 as support this time
Recession risks may have skewed yield data
The only thing that is certain at present is that investors’ expectations of a recession are becoming ever clearer. Aside from the US Treasury Department yield, the US Conference Board leading indicators declined for 14 straight months, as Charlie Bilello describes:
Consequently, those betting that Bitcoin’s recent decoupling from the U.S. Treasury Department’s inverse yield correlation will quickly bounce back may be disappointed. The data confirms that government bond yields are higher than normal on heightened expectations of an imminent recession and economic crisis.
This article does not contain any investment advice or recommendations. Any investment and trading venture involves risk, and readers should do their own research when making their decision.
This article is provided for general informational purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of Cointelegraph.
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