United States Government bonds, also known as Treasurys, play a significant role in all tradeable markets, including cryptocurrencies like Bitcoin (BTC) and Ether (ETH). The cost of capital attributed to U.S. dollars influences loans, mortgages, and even cryptocurrency derivatives. In the event that the U.S. government defaults on its debt, it would have severe consequences for families, businesses, and countries holding those bonds. The lack of interest debt payments would lead to a global shortage of U.S. dollars, causing a cascading effect.
However, history has shown that cryptocurrencies can act as a hedge during periods of uncertainty. One notable example is Bitcoin’s performance during the U.S.-China trade war in May 2021. While traditional wealth preservation assets, such as the Nasdaq Composite, experienced losses, Bitcoin gained 47%. This suggests that cryptocurrencies may provide a safeguard against economic turbulence.
With the general public holding over $29 trillion in U.S. Treasurys, these bonds are considered the lowest-risk assets. However, the price and yield of each government bond vary depending on the contract maturity. The inflation expectation plays a crucial role in determining the pricing of these bonds. If investors believe that inflation will persist, they will seek higher yields when trading Treasurys. Conversely, if there is an expectation of currency devaluation or additional inflation, investors tend to seek refuge in U.S. Treasurys, driving down the yield.
Examining the 5-year Treasury yield provides insights into investors’ sentiments. For example, when the yield reached 4.05% on June 22, it indicated that investors did not expect inflation to drop below the central bank’s 2% target in the near future. However, the pricing of Treasury bonds is not solely based on the yield. Investors are willing to accept lower rewards in exchange for the security offered by these low-risk assets.
While U.S. Treasury yields are useful for comparing other countries and corporate debt, they may be constrained if a global recession becomes more likely. During uncertain times, investors tend to seek scarce and inflation-protected assets, but their appetite for excessively valued equities may be limited. This explains the invalidation of the typical inverse correlation between Bitcoin and the U.S. Treasury yield in the past 10 days. Investors are prioritizing the safety of government bonds, regardless of the lower yield compared to inflation expectations.
The higher yields observed in Treasury bonds can be attributed to increasing expectations of a recession. Various indicators, including the U.S. Conference Board’s leading indicators, have consistently declined for 14 months. This suggests that investors are anticipating an economic crisis and recession in the near future. Consequently, those expecting Bitcoin’s decoupling from the U.S. Treasury’s yield inverse correlation to quickly revert might be disappointed. The data supports the notion that government bond yields are elevated due to heightened expectations of an upcoming economic crisis and recession.
It is important to note that this article does not provide investment advice or recommendations. Every investment and trading move involves risk, and it is essential for readers to conduct their own research before making any decisions. The information presented here is for general purposes only and should not be taken as legal or investment advice. The author’s views and opinions expressed in this article do not necessarily reflect the views and opinions of Cointelegraph.
