On April 11, Neel Kashkari, President of the Minneapolis Federal Reserve, discussed the rising Treasury yields and suggested they may reflect a shift in investor sentiment regarding U.S. government debt. He emphasized that the Federal Reserve possesses tools to inject more liquidity if needed.
Kashkari’s comments, while reinforcing the commitment to fight inflation, indicate a potential inflection point for Bitcoin (BTC) investors amid increasing economic instability.
US Treasury 10-year yields. Source: TradingView / Cointelegraph
The current 10-year U.S. government bond yield stands at 4.5%, which is not considered out of the ordinary. Even if it approaches 5%, a level last experienced in October 2023, this does not automatically indicate a loss of investor confidence in the Treasury’s ability to fulfill its debt obligations. For instance, gold surpassed the $2,000 mark in late November 2023, after yields had already declined to 4.5%.
Could the Fed introduce liquidity, and how might this affect Bitcoin?
Increasing Treasury yields typically signal worries about inflation or economic uncertainty, which is crucial for Bitcoin traders, as higher yields generally make fixed-income investments more attractive. Nevertheless, if these rising yields are seen as signs of more serious systemic challenges—such as diminishing confidence in government fiscal strategies—investors may look towards alternative safeguards like Bitcoin.
Bitcoin/USD (left) vs. M2 global money supply. Source: BitcoinCounterFlow
The direction Bitcoin takes will largely depend on the Federal Reserve’s responses. Strategies aimed at injecting liquidity often lead to rising Bitcoin prices, but allowing higher yields could increase borrowing costs for consumers and businesses, which may slow economic growth and negatively affect Bitcoin’s price in the near term.
One tactic the Federal Reserve could consider is buying long-term Treasurys to lower yields. To counter the added liquidity from these bond purchases, the Fed might simultaneously engage in reverse repos, borrowing cash from banks overnight in exchange for securities.
Weak US dollar and banking risks could elevate Bitcoin prices
While this method might stabilize yields temporarily, aggressive bond purchases could imply desperation in controlling rates. Such a perception could erode confidence in the Fed’s ability to effectively manage inflation, often resulting in diminished trust in the dollar’s purchasing power and pushing investors towards Bitcoin as a hedge.
Another potential approach could involve offering low-interest loans through the discount window to provide banks with immediate liquidity, thereby reducing their necessity to sell long-term bonds. To balance the liquidity injected, the Fed might implement stricter collateral requirements, such as valuing pledged bonds at 90% of their market price.
Systemic risk in the US financial services industry. Source: Cleveland Fed
This alternative approach restricts banks’ cash access while ensuring that borrowed funds stay tied to collateralized loans. However, if collateral requirements become overly restrictive, banks might struggle to secure adequate liquidity, even with access to discount window loans.
Related: Bitcoiners’ ‘bullish impulse’ on recession may be premature: 10x Research
While it is premature to predict the Federal Reserve’s course, considering the recent weakness in the U.S. dollar alongside a 4.5% Treasury yield, investors might not fully trust the Fed’s measures. Instead, they could gravitate toward safe-haven assets like gold or Bitcoin for security.
Ultimately, instead of solely monitoring the US Dollar Index (DXY) or the US 10-year Treasury yield, traders should closely observe systemic risks in financial markets and the spreads on corporate bonds. As these indicators rise, faith in traditional financial systems may deteriorate, potentially paving the way for Bitcoin to reach the psychological $100,000 price point.
This article is intended for general information purposes only and should not be considered legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
