The 10-year U.S. Treasury yield hit the highest level in the last 12 years. However, how does this affect investors’ sentiment towards stocks and cryptocurrencies like BTC, SHIB, and ETH? Market and crypto expert Marcel Pechman seeks an answer to this question.
How do US treasury returns affect cryptocurrencies like BTC?
In all markets and cryptocurrencies like BTC, US Treasury yields have a significant impact. In finance, any measure of risk is relative. So if a person is insuring a house, the maximum liability is set as some kind of money. Similarly, if a loan is taken from a bank, the creditor has to calculate the probability that the money will not be returned. In addition, the amount must take into account the risk of depreciation due to inflation.
In the worst-case scenario, let’s imagine what would happen to the lending-related costs if the U.S. government temporarily suspended payments to certain regions or countries. Currently, there are over $7.6 trillion in bonds held by foreign entities. Also, multiple banks and governments depend on this cash flow.
The potential cascading impact from countries and financial institutions will immediately affect their ability to reconcile their imports and exports. In addition, each participant will rush to reduce their risk exposure. So it will lead to more carnage in the lending markets. There is more than $24 trillion in U.S. Treasuries held by the general public. For this reason, respondents generally assume that the lowest risk available is a government-backed debt cap.
Treasury yields are nominal, so watch out for inflation!
The return, which is widely covered by the media, is not what professional investors trade. Because each bond has its own price. However, depending on the contract term, it is possible for traders to calculate the equivalent annual return. This makes it easier for the general public to understand the benefit of holding bonds. For example, buying the US 10-year Treasury at 90 entices the owner with a 4% return until the contract matures.
Investors may think that inflation will not be brought under control anytime soon. In this case, these participants tend to demand higher yields on their 10-year bond transactions. On the other hand, if other governments are at risk of going bankrupt or overinflating their currencies, these investors are likely to take refuge in US Treasuries.
A delicate balance allows US government bonds to trade lower than competing assets like BTC and even operate below expected inflation. For example, a few years ago central banks did something unbelievable. Central banks cut interest rates to zero to stimulate their economies in 2020 and 2021. After that, negative returns became quite common. During this period, investors flocked to crypto assets like BTC. The crypto market has experienced a long-running bull market.
Investors do not want to face the risk from bank deposits. Instead, they have government-backed bonds and pay for the privilege. As crazy as it sounds, there are still over $2.5 trillion of negative-yielding bonds that don’t take into account the effect of inflation.
Regular bonds price higher inflation
To understand how disconnected the US government bond has become from reality, it is necessary to understand that the yield on the three-year bond is 4.38%. By the way, cryptocoin.comAs you can follow, consumer inflation hovers around 8.3%. Therefore, investors either think the Fed will successfully ease the benchmark or are willing to forfeit their purchasing power in exchange for the lowest risk asset in the world.
In modern history, the United States has never paid its debt. In simple terms, the debt ceiling is a self-imposed limit. Thus, Congress decides how much the federal government can lend. For comparison, an HSBC Holdings bond that expires in August 2025 is trading with a yield of 5.90%. Essentially, US Treasury yields should not be interpreted as a reliable indicator for inflation expectations. Also, it matters less if it hits the highest level since 2008. Because the data shows that investors are willing to sacrifice their earnings for the security of owning the lowest-risk asset.
All in all, US Treasury yields are a great tool to measure against other countries and corporate debt. But not in an absolute sense. These government bonds will reflect inflation expectations. But it can be severely limited if the generalized risk on other issuers increases.
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