Bitcoin Nears $25K as Interbank Funding Stress Indicator Surges to Highest Level Since COVID Crash

Banking sector stress strengthens the case for the Federal Reserve to pause its campaign of raising interest rates next week.

AccessTimeIconMar 14, 2023 at 8:56 a.m. UTC
Updated Mar 14, 2023 at 3:45 p.m. UTC

Bitcoin (BTC) continued to rally early Tuesday as a key banking sector risk indicator spiked, strengthening the case for a pause in rate hikes by the Federal Reserve.

The leading cryptocurrency by market value rose to a three-week high of $24,900, extending a three-day winning streak, CoinDesk data shows. Prices pretty much reversed the entire drop from $25,000 to $19,500 seen in the second half of February.

The gap between the U.S. three-month forward rate agreement, or FRA, and the overnight index swap rate, or OIS, also known as the FRA-OIS spread, a measure of how costly it is for banks to borrow U.S. dollars from one another, surged to 54.00, the highest since March 2020, according to data source MacroMicro.

The borrowing and lending between banks is a crucial component of the banking system that helps banks manage their immediate liquidity needs. When the interbank lending market is strained or dysfunctional, banks face greater liquidity risk, which can result in insolvency.

So, the sharp rise in the FRA-OIS spread is a sign of the system reaching a point of vulnerability. That strengthens the case for the Fed to pause its rate hike cycle at next week's meeting or opt for a smaller 25 basis points move instead of the 50 basis point raise expected last week. The central bank has lifted the official borrowing cost by 4.5 percentage points in one year, roiling risky assets, including cryptocurrencies.

"Banking sector stress strengthens the case for Fed pause next week. Likely beneficiaries from the financial stress are gold and bitcoin – hard assets," Noelle Acheson, author of the popular Crypto is Macro Now newsletter, told CoinDesk. "Likely beneficiaries from the financial stress are gold and bitcoin, the hard assets."

The surge in the banking stress indicator comes after the failure of three U.S. banks, including the startups-focused Silicon Valley Bank, within five days and has prompted investors to reassess their outlook for interest rates.

The Fed rate hike bets have crumbled in the past 24 hours as the CME's FedWatch tool now suggests a 46% chance that the central bank will keep rates unchanged in the range of 4.5%-4.75% next week.

Markus Thielen, head of research and strategy at crypto-services provider Matrixport, said that signs of financial market stress might mean more government guarantees in terms of liquidity. Bitcoin and cryptocurrencies, in general, are widely considered to be pure liquidity plays.

"Financial market stress indicators have risen to the highest levels since the European debt crisis a decade ago. At the same time, credit default swaps, which measure the cost of insuring bond portfolios against defaults, have increased markedly. Bitcoin has benefited as more government guarantees might mean more money printing," Thielen said.

The FRA-OIS spread has risen to the highest since the coronavirus-induced crash of March 2020. (MacroMicro)
The FRA-OIS spread has risen to the highest since the coronavirus-induced crash of March 2020. (MacroMicro)

While the FRA-OIS spread is nowhere close to levels seen during the great financial crisis of 2008, it is significantly higher than in recent weeks.

According to ING, the sharp deviation higher from the recent range has weakened the case for a 50 basis point rate hike.

"It's a market deviation versus the very tight FRA/OIS spread seen in recent weeks. We remarked at the time that such a tight spread meant that the Fed could indeed deliver a 50 bp hike at the March meeting, as the system was taking it quite calmly. That's clearly changed in the wake of the Silicon Valley Bank collapse," analysts at ING wrote in a note to clients on Tuesday.

"The Fed would no doubt prefer the system to look and feel safer. U.S. CPI [inflation data due on Tuesday] is less relevant – the system is key for now," the analysts added.

The U.S. Bureau of Labor Statistics is scheduled to release inflation figures for February on Tuesday at 12:30 UTC.

According to Reuters, the forecast is for the Consumer Price Index to rise 0.4% from January, bringing the year-over-year rate to 6%, which would mark a decline from January's 6.4% reading. The core CPI, which excludes the volatile food and energy component, is projected at increase by 0.4% from January and by 5.5% from February 2022.


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Omkar Godbole

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