Ether Could Continue to Underperform Bitcoin as U.S. Bond Market 'Dis-Inversion' Resumes

The spread between yields on 10-year and three-month Treasury notes has resumed the recovery toward zero. Ether has a strong inverse correlation with the yield spread than bitcoin.

AccessTimeIconOct 18, 2023 at 8:42 a.m. UTC

Ether (ETH) has underperformed bitcoin (BTC) significantly this year and the trend could continue.

That's an apparent signal from the U.S. Treasury government bond market, where the gap between yields on the 10- and three-month notes has resumed the recovery higher toward zero in a move known as dis-inversion, or steepening, in bond market parlance.

Since early this year, crypto prices have had an inverse relationship with the above-mentioned yield spread, gaining ground during inversion and losing value with dis-inversion. While bitcoin's 90-day inverse correlation with the yield spread has weakened to -0.42 from -0.8 in the first half, ether's remains strong near -0.75, according to data tracked by Coinbase.

Yield spread refers to the difference between yields of differing debt offerings, such as bonds or other fixed-income assets.

So, the recent dis-inversion of the yield spread could hurt ether more than bitcoin, more so as optimism from potential spot ETF launch could keep the latter insulated. The conclusion is also consistent with the long-prevailing crypto market narrative that considers ether analogous to rate-sensitive technology stocks while seeing bitcoin as 'digital gold.'

The spread has dis-inverted, or risen, by 29 basis points to -0.65% in the past seven days to the highest since early January, data shows. The ascent has more than reversed the brief inversion from -0.80% to -0.94% seen early this month.

The spread between 10-year and three-month yields is one of the most widely tracked sections of the yield curve. The negative spread has historically been viewed as a precursor to economic recessions, with eventual dis-inversion/steepening marking major equity market tops.

The spread between yields on 10- and three-month notes has resumed dis-inversion. (TradingView/CoinDesk)
The spread between yields on 10- and three-month notes has resumed dis-inversion. (TradingView/CoinDesk) (TradingView/CoinDesk)

The spread fell by 130 basis points to -1.92 in the year's first five months. Most of bitcoin and ether's year-to-date gains of 72% and 32% happened in the year's first half.

The spread between the 10- and two-year notes, another widely followed bond market gauge, has also dis-inverted by nearly 70 basis points to -0.34% in three months, raising the risk of broad-based risk aversion in financial markets.


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Omkar Godbole

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