The influence of United States Government bonds, also known as Treasurys, is far-reaching beyond the financial markets. The cost of capital attributed to U.S. dollars affects every loan, mortgage, and even cryptocurrency derivatives. But what happens if the U.S. government defaults on its debt, and there is no interest debt payment? This scenario could trigger a global shortage of U.S. dollars, leading to a cascading effect across various markets. However, history shows that cryptocurrencies, such as Bitcoin and Ether, can work as a hedge during times of uncertainty.

Impact of Inflation Expectation on Bitcoin and Ether

The general public owns over $29 trillion in the U.S. Treasury, which is considered the lowest risk asset. However, the price of each government bond, or the yield traded, varies depending on the contract maturity. Assuming there is no counterparty risk for this asset class, the single most important pricing factor is the inflation expectation. If an investor believes that inflation will not decrease anytime soon, they are likely to seek a higher yield when trading Treasury. Conversely, if the U.S. government is devaluing its currency or there is an expectation for additional inflation, investors will tend to seek refuge in US Treasurys, causing a lower yield.

The 5-year Treasury yield reached 4.05% on June 22, the highest level in more than three months. This movement happened 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 anytime soon, but it also shows confidence that the 9.1% peak CPI data from June 2022 is behind us. However, Treasury pricing works differently because investors are willing to forego rewards in exchange for the security of owning the lowest-risk asset.

The Relationship Between Bitcoin and U.S. Treasury Yields

The typical inverse correlation between Bitcoin and U.S. Treasury yields has been invalidated in the past 10 days, most likely because investors are desperately buying government bonds for their safety regardless of the yield being lower than inflation expectations. The S&P 500 index, which measures the U.S. stock market, hit 4,430 on June 16, just 7.6% below its all-time high, which also explains the higher yields. While investors typically seek scarce and inflation-protected assets ahead of turbulent times, their appetite for excessive equity valuations is limited.

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

The influence of U.S. Treasury bonds on various markets cannot be ignored. The inflation expectation plays an essential role in the yield traded for Treasury bonds, affecting the demand for cryptocurrencies such as Bitcoin and Ether. However, the inverse correlation between Bitcoin and U.S. Treasury yields has been disrupted due to investors’ urgent need for safety. As the U.S. economy faces challenges, investors’ appetite for excessive equity valuations may be limited, and their expectations for a recession may increase.

Analysis

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