What Does Rising US Treasury Yields Mean for Bitcoin Price?

U.S. Government bonds, popularly known as Treasurys, have a profound effect on all tradable markets, such as Bitcoin (BTC) and Ether (ETH). This means that the risk assessment in finance is relative, as the cost of capital for loans, mortgages, and even cryptocurrency derivatives is linked to the value of the U.S. dollar.

In the event of a U.S. government default on its debt, families, businesses, and countries holding those bonds would be affected adversely. The lack of interest payments would likely cause a global shortage of U.S. dollars, leading to a domino effect.

Despite the possibility of the aforementioned scenario coming to pass, history demonstrates that cryptocurrencies can act as a safeguard during times of instability. As an example, Bitcoin achieved much greater success than traditional wealth-preserving assets during the U.S.-China trade war in May 2021. From May 5 to May 31, 2021, Bitcoin increased by 47%, while the Nasdaq Composite decreased by 8.7%.

With the general public holding more than $29 trillion in U.S. Treasury bonds, they are considered the least risky investment in existence. However, the cost of each bond, or the yield that is traded, will fluctuate depending on the maturity of the contract. Given that there is no counterparty risk associated with this asset class, the most influential factor in pricing is the expectation of inflation.

Let us investigate if the increasing demand for U.S. Treasurys will have an effect on the prices of Bitcoin and Ether.

Higher demand for government bonds leads to lower yields

If it is believed that inflation will continue unabated, an investor trading in Treasury securities may be inclined to pursue a higher yield. However, if the US government is actively depreciating its currency or if further inflation is anticipated, investors will likely turn to US Treasurys as a safe haven, leading to a decrease in yield.

On June 22, the 5-year Treasury yield rose to its highest point in more than three months, reaching 4.05%. This increase occurred at the same time that the U.S. Consumer Price Index (CPI) for May showed a year-over-year growth of 4.0%, which was the lowest since March 2021.

A 4.05% yield suggests that investors do not anticipate inflation to dip below the central bank’s 2% objective in the near future, but it also implies trust that the 9.1% peak CPI data from June 2022 is now in the past. Nevertheless, that is not how Treasury pricing functions since investors are willing to give up returns in exchange for the security of owning the least hazardous asset.

U.S. Treasury yields can be useful for comparing the debt of other nations and corporations, but not unconditionally. These government bonds will display inflation expectations, but the yields could be drastically limited if a worldwide recession appears to be imminent.

In the last 10 days, the usual inverse relationship between Bitcoin and the U.S. Treasury yield has been broken, likely due to investors purchasing government bonds for security despite the yield being lower than anticipated inflation.

The S&P 500 index, which gauges the U.S. stock market, reached 4,430 on June 16, only 7.6% short of its record high, which explains the higher yields. Investors usually seek resources that are rare and safe from inflation when expecting difficult times, but their enthusiasm for overvalued equities is constrained.

Data concerning the price of Bitcoin suggests that bulls will be successful in maintaining $30K as a support level this time.

Recession risks could have distorted the yield data

Investors’ expectations of an impending recession are becoming increasingly clear, as demonstrated by the Treasury’s yield and the U.S. Conference Board’s leading indicators, which have declined for 14 consecutive months, as Charlie Bilello has noted.

Those who are gambling that Bitcoin’s disconnection from the U.S. Treasury’s yield inverse correlation will soon go back to its original position may be let down. Data verifies that government bond yields are higher than usual due to amplified apprehensions of an economic downturn and crisis in the near future.