Exploring the Impact of U.S. Treasuries on Bitcoin and Ether Prices

Exploring the Impact of U.S. Treasuries on Bitcoin and Ether Prices

U.S. Treasury bonds or Treasurys are essential in all tradeable markets, including Bitcoin and Ether. The cost of capital attributed to U.S. dollars affects every loan, mortgage, and even cryptocurrency derivatives. In the worst-case scenario of the U.S. government defaulting on its debt, the lack of interest debt payments may cause a global shortage of U.S. dollars, triggering a cascading effect.

However, history shows that cryptocurrencies may work as a hedge during periods of uncertainty. Bitcoin vastly outperformed traditional wealth preservation assets during the U.S.-China trade war in May 2021, gaining 47% while the Nasdaq Composite shed 8.7%.

The general public owns over $29 trillion in U.S. Treasuries, which are considered the lowest risk asset class. However, the price of government bonds or the yield traded will vary depending on the contract maturity. Inflation expectations are the single most important pricing factor for this asset class.

The Impact of Growing Demand for U.S. Treasuries on Bitcoin and Ether Prices

Investors seeking higher yields when trading in Treasury assume that inflation will not be restrained anytime soon. If the U.S. government is actively devaluing its currency or there’s an expectation for additional inflation, investors tend to seek refuge in U.S. Treasuries, causing a lower yield.

On June 22, the 5-year Treasury yield reached 4.05%, the highest level in more than three months, while the U.S. Consumer Price Index (CPI) for May came in at 4.0% on a year-over-year basis, the lowest growth since March 2021. A 4.05% yield indicates that investors are not expecting inflation to drop below the central bank’s 2% target soon, but it also shows confidence that the peak CPI data from June 2022 is behind us. However, investors are willing to forego rewards in exchange for owning the lowest-risk asset, which is how Treasury pricing works.

U.S. Treasury yields are a great tool for comparing other countries and corporate debt, but not in absolute terms. These government bonds will reflect inflation expectations, but they may be severely constrained if a global recession becomes more likely.

The typical inverse correlation between Bitcoin and the U.S. Treasury yield has been invalidated in the past 10 days, most likely because investors are buying government bonds for their safety regardless of the yield being lower than inflation expectations.

Investors’ expectations for a recession are becoming more evident, with the U.S. Conference Board’s leading indicators declining for 14 consecutive months. Therefore, those betting that Bitcoin’s recent decoupling from the U.S. Treasury’s yield inverse correlation will quickly revert may come out disappointed. Data confirms that government bond yields are higher than normal due to increased expectations of a recession and economic crisis ahead.

U.S. Treasuries have a significant impact on global markets, including Bitcoin and Ether prices. While cryptocurrencies may act as a hedge during periods of uncertainty, inflation expectations are the single most important pricing factor for Treasury bonds. Investors are seeking safety in government bonds, regardless of the yield, due to increased expectations of a recession and economic crisis ahead.


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