- Bond yields have inverted to the lowest level in over three decades.
- The rise of bond yields could have implications for Bitcoin prices.
Global short-term bond yields have surged in the past few months, presenting a major risk to stocks and Bitcoin price. This surge and the inverted yield curve, explains why Bitcoin price has struggled to move above the key resistance at $25,000. It also explains why the Dow Jones, S&P 500, and Nasdaq 100 indices have lost their steam.
US bond curve inversion
The bond market is sending a major warning that threatens the performance of cryptocurrencies and other financial assets. In the United States, the 1-year treasury note has a yield of 5.06% while the 2-year is yielding 4.88%. And analysts expect that the latter will move to 5% soon. On the other hand, longer-dated bond yields such as the 30-year are below 4%.
This means that the yield curve has inverted to the lowest level since the 1980s. There are two main implications for this. First, the yield curve inversion is signaling that there will be a recession in the coming months.
Historically, all inversions have come ahead of a major recession. In most cases, stocks and cryptocurrencies tend to underperform during a recession and then bounce back as the Fed intervenes with rate cuts and quantitative easing (QE).
The other main implication is known as sector rotation, which happens when investors shift their assets from risky assets to less riskier ones. In this case, investors are moving their assets from risky cryptocurrencies and stocks to bonds. Besides, an investment in a 2-year bond is yielding almost 5%, which is substantial, especially among large institutional funds.
Read more: Best Bitcoin exchanges.
Fed officials hint that higher rates are coming
Sadly, analysts expect that interest rates will continue hiking in the coming months. This is based on the recent strong economic numbers from the United States. For example, PCE, Fed’s favorite inflation tool, has remained above 5% in the past few months. Similarly, headline and core inflation have been at an elevated level while the unemployment rate has plunged to the lowest level in 53 years.
In separate statements on Wednesday, Fed’s Loretta Mester and Neel Kashkari said that the Fed should not relent on its rate hikes. They are advocating 0.50% hike in March even though they are not FOMC voting members. Analysts have penciled in a 0.25% rate hike in March, May, and June.
The implication for Bitcoin prices is dire. After soaring to $25,200 in February, we could see BTC retest the important support level at $20,000 in March. The only hope is on technicals, where BTC has formed an inverted head and shoulders pattern.
