The 5-year US Treasury yield has ascended to a three-month peak. However, the traditional inverse correlation with Bitcoin’s value might not play out as expected this time around.

US Government Bonds and Their Impact on Cryptocurrency Markets

US Government bonds, also known as Treasurys, exert considerable sway over all tradeable markets, Bitcoin and Ether included. Risk evaluation in finance is a relative game, and all forms of borrowing, from home loans to cryptocurrency derivatives, hinge on the cost of capital pegged to the US dollar.

In a hypothetical scenario of the US government defaulting on its debt, the fallout for those invested in these bonds could be catastrophic. A likely outcome would be a global deficit of US dollars, igniting a domino effect. Nonetheless, historical evidence suggests that cryptocurrencies may serve as a safe haven in uncertain times. Bitcoin, for instance, surged by 47% amid the US-China trade skirmish in May 2021, while the Nasdaq Composite dipped by 8.7%.

The public holds more than $29 trillion in US Treasury bonds, which are perceived as the safest of investments. However, the value of these bonds, or the yield traded, fluctuates based on their term. If we assume there’s no counterparty risk for this asset class, inflation expectations become the pivotal pricing factor.

Let’s delve into how Bitcoin’s and Ether’s values could react to rising demand for US Treasurys.

US Treasury Demand and Yield Dynamics

An investor who anticipates that inflation will not be curbed soon is likely to demand a higher yield when trading the Treasury. Conversely, if the US government is seen to be diluting its currency or further inflation is expected, investors will generally turn to US Treasurys, which in turn lowers the yield.

It’s noteworthy that the 5-year Treasury yield climbed to 4.05% on June 22, a record high for the past three months. This occurred alongside the announcement of the US Consumer Price Index (CPI) for May, which clocked a year-over-year growth of 4.0%, the lowest since March 2021.

Assessing the Impact on Bitcoin and the Treasury Yield

Historically, Bitcoin and the US Treasury yield have exhibited an inverse correlation. However, this relationship has seemed less valid over the past ten days. This change may be due to investors prioritizing the safety of government bonds over potential returns, even if the yield lags behind inflation expectations.

The S&P 500 index, a gauge of the US stock market, reached 4,430 on June 16, just 7.6% below its record peak. This likely contributes to the higher yields, as investor tolerance for excessive equity valuations tends to be limited, especially during turbulent times.

Understanding the Recent Yield Data Anomalies

Currently, signs are pointing to heightened investor anticipation of a potential recession. In addition to the Treasury’s yield, the US Conference Board’s leading indicators have consistently declined for 14 consecutive months. Hence, those betting on a swift restoration of Bitcoin’s inverse correlation with the US Treasury yield might be in for a surprise. Data indicates that government bond yields are above average due to rising fears of a recession and impending economic crisis.

For cryptocurrency investors, it’s essential to consider the broader economic landscape, including developments in other financial markets such as government bonds. These factors can significantly impact the value of cryptocurrencies, and being aware of these developments can help investors make more informed decisions.

As always, it’s crucial to do thorough research and possibly seek advice from financial advisors before making any investment decisions.