Bitcoin poised for a smooth medium-term bull run as U.S. treasury yields flatten

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PUNE (CoinChapter.com) — Bitcoin and similar risky assets sank in the first two days of this week as markets assessed the Federal Reserve’s potential to raise interest rates sooner than expected after their two-day policy meeting Wednesday. Nonetheless, the flagship cryptocurrency remained hopeful to continue its year-to-date price rally further as bond markets sent warnings signals about the U.S. economy’s growth prospects.

U.S. yield curve as a benchmark of global growth

In detail, the U.S. treasury yield curve flattened out Tuesday, i.e., the returns on the short-dated bonds become almost the same as the ones offered by longer-dated bonds. According to Mike Riddell, a bond portfolio manager at Allianz Global Investors, the flattening yield curve suggests that markets have been expecting an economic slowdown or — worse — a recession ahead.

“What the market is telling you is that this economic cycle is likely to be much, much shorter than previous ones. You don’t normally see this kind of flattening so early in the recovery.”

he added.

Thanks to its central position of the dollar in the global financial system — it acts as a barometer of investors’ collective opinion about the future trajectory of the world’s largest economy. Moreover, it has a strong record in signaling downturns before they arrive.

The yield curve is ideally upward sloping, wherein a higher fixed rate of return is associated with lending money for longer periods. Shorter-term yields represent what investors believe will happen to central bank policies shortly.

For now, the flattening in the yield curve can at some point become a recessionary signal, especially when it becomes downward-sloping or inverted. An inversion of the yield curve has preceded every U.S. recession for the past half-century.

US Treasury 10Y Bond vs. the Bitcoin

Apparent in the historical chart below, in times of extremely low bond yields and massive inflation, driven by government and central bank fiscal and monetary policy, many consider Bitcoin as a go-to haven.

However, a generic observation based on history supports that a sustained uptick in real or inflation-adjusted yields poses a downside risk to Bitcoin’s price. Treasury data shows that the U.S. 10-year real yield has risen by 20 basis points this month but remains deep in negative territory at -0.87%.

A continued ascent in real yields may jeopardize the position of Bitcoin as the new age inflation hedge.

“If investors are looking at crypto, they’re on the hunt for the deepest yield – a yield that they struggle to get more and more from traditional markets. Unfortunately, that coupled with the poor macro backdrop and continued soaring inflation means that crypto yield is only just getting started,” said Ben Sibley, chief growth officer at BCB Group, a business-to-business provider of banking rails to crypto companies.

“Once TradFi (traditional finance) overcomes all the initial barriers to entry, I think this will be the thing that takes the crypto industry to the next level of global adoption.”

he added.

Balancing the tapering critical to asset prices in near term

While the central banks are poised for a rate hike to counter inflation, the extent of the hike is the real question. To some investors, this latest flattening signifies that the Fed will only raise rates a small amount to avoid yield inversion.

Others project that any aggressive rate rise could choke off the economic growth and force the banks to cut rates again. But, in essence, the flattening yield curve is here to stay in the short-medium term, promising a higher demand for Bitcoin as a safer store of value.

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