Volatility in $25 Trillion U.S. Treasury Market Slides. Here's Why It Matters to Crypto

The MOVE index, an options-based measure of turbulence in Treasury notes, dropped to an 18-month low last week.

AccessTimeIconSep 20, 2023 at 10:06 a.m. UTC

There is an uncanny sense of calm in the $25 trillion U.S. Treasury market even as the Federal Reserve shows its resolve to keep borrowing costs higher. The tranquility is supportive of risk assets, including cryptocurrencies.

The MOVE index, an options-based measure of volatility in Treasury notes, fell to 96.61 on Friday, the lowest since the Fed began raising rates in March 2022, according to charting platform TradingView. At press time, it is down almost 50% from the peak of 198 registered this March.

Treasury debt securities, issued by the government and widely considered the world's safest and most liquid instruments, have risen to the apex of global collateral and securities finance.

Reduced bond volatility stabilizes leveraged financing, allowing the rehypothecation of collateral to create money. In other words, it alleviates liquidity stress in the global market, incentivizing higher borrowing and gearing of portfolios. That is a positive outcome for risk assets like bitcoin and stocks. Higher bond market volatility does the opposite, forcing leveraged players to sell assets and reduce their exposure to risk. Peaks in the MOVE index tend to mark bottoms in stock market indexes.

Bitcoin has regained some poise during the MOVE index's recent decline. The largest cryptocurrency by market value has risen by over 8% since hitting a low below $25,000 on Sept. 11, CoinDesk data show.

The latest decline in the index helps ease financial conditions, while major central banks appear in no mood to deliver rapid rate cuts any time soon.

The index, however, may surge if an unexpected shock forces the unwinding of leveraged short bets in Treasury futures.

"The current build-up of leveraged short positions in U.S. Treasury futures is a financial vulnerability worth monitoring because of the margin spirals it could potentially trigger," the Bank for International Settlements warned in its latest quarterly report. According to the BIS, about $600 billion worth of short positions are currently open in the Treasury market.

Edited by Sheldon Reback.


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Omkar Godbole

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