Observers Cautious for Bitcoin as US Inflation-Adjusted Bond Yield Hits 2-Year High

Typically rising borrowing costs hurt risk assets, one research firm said.

AccessTimeIconApr 6, 2022 at 9:12 a.m. UTC
Updated May 11, 2023 at 6:43 p.m. UTC
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Just when you think the crypto-native developments have put the market on solid footing, macro factors threaten to make the ground shaky again.

Specifically, the surging inflation-adjusted and nominal government bond yields in the U.S. and worldwide could complicate matters for risk assets, including bitcoin (BTC) and traditional store of value assets like gold.

According to the St. Louis Bank of Federal Reserve, the U.S. 10-year real or inflation-adjusted Treasury yield has risen to -0.38% this week, the highest since early June 2020. While the yield remains negative, it has seen a near-90 degree rise of 66 basis points in four weeks.

"Another big leg up for gold and bitcoin will likely occur when real yields stop rising. We are not there yet," Jeroen Blokland, founder and research head at investment research platform True Insights, tweeted.

Kaiko Research's weekly newsletter, published Monday said, "Typically, rising borrowing costs hurt risk assets such as tech stocks and crypto, which appear less attractive to investors than safe-haven bonds."

Bitcoin means many things to many people. For crypto believers, bitcoin is a digital version of gold and an alternative to the U.S. dollar, a global reserve currency. However, traditional market investors largely treat it as a risk-on asset similar to stocks. That's evident from its strengthening correlation with the S&P 500 and technology stocks.

U.S. 10-year Treasury yield adjusted for inflation versus bitcoin's price (St. Louis Fed/Coinbase)
U.S. 10-year Treasury yield adjusted for inflation versus bitcoin's price (St. Louis Fed/Coinbase)

The chart above shows a lack of consistent correlation between bitcoin and the real yield. However, bitcoin's November peak coincided with a bottom in the 10-year real yield. Perhaps macro traders, who accumulated bitcoin as a store of value asset in the aftermath of the coronavirus-induced crash of March 2020, trimmed exposure, tracking the uptick in the real yield, as one observer warned last year.

Hawkish Federal Reserve expectations and a continued rise in the nominal 10-year yield have led to a sharp increase in the real yield.

The nominal yield stood at a three-year high of 2.6% at press time, accounting for a 40 basis point rise since the Fed raised rates on March 16, according to the charting platform TradingView. The yield is up more than 100 basis points on a year-to-date basis and the rally is becoming a source of worry for observers.

"The rise in the 10-year Treasury yield is continuing in Asian trading. There've been plenty of bond market false alarms over the years, but this is beginning to look a lot like the long-feared breakout," John Authers, Bloomberg's senior editor for markets, tweeted.

When asked what level on the 10-year yield could start becoming a headache for risk assets, Authers replied, "Around about now, if not a while ago. ..."

Twitter conversation with Bloomberg's John Authers.
Twitter conversation with Bloomberg's John Authers.

Asian stocks traded lower at press time alongside losses in the European equity futures, per On Tuesday, U.S. stocks fell more than 1% and the rally in yields picked up the pace after Fed Governor Lael Brainard said the central bank could resort to a rapid balance sheet runoff to bring U.S. monetary policy to a "more neutral position" later this year.

Bitcoin changed hands near $45,500 as of writing, according to CoinDesk data. Accumulation by Luna Foundation Guard (LFG) and an uptick in stock markets perhaps overshadowed the rising real yield and helped the cryptocurrency carve out gains following the mid-March rate hike. LFG's confirmed bitcoin address shows the accumulation has slowed this month, making bitcoin vulnerable to adverse macro developments.

"Now risk aversion is gradually rising, and the dollar index has reached its year-to-date highest level," Griffin Ardern, a volatility trader from crypto-asset management company Blofin, said. "The liquidity contraction may be accelerating. At 2 p.m. ET, details of the March [Federal Open Market Committee] meeting will be announced."


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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.

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