NewBloc: The impact of rising U.S. debt on the cryptocurrency market

The author of this article is NewBloc Strategic Analyst Barry, with 5 years of experience in foreign exchange and gold market trading.

As U.S. bond yields continue to rise, it has undoubtedly posed a certain threat to global financial assets, and liquidity is gradually fading, which may be the first to be affected by highly valued and highly speculative varieties.

In fact, U.S. bond yields have bottomed out since August 7 last year. At the Fed meeting on August 7, 2020, Fed officials collectively voiced their opposition to negative interest rates. So far, U.S. bond yields have blocked the lower limit, while gold and silver peaked. At this time, the rise in U.S. Treasury yields did not have a major impact on the financial market. On the one hand, it was due to excess liquidity in the market, and on the other hand, the U.S. bond yields continued to fall. Until the Democratic Party unified the two houses, U.S. bond yields began to rise sharply. According to the survey on January 2, 2021, the two Democratic candidates have a weak advantage over the Republican candidates, which means that the probability of the Democratic Party becoming the majority party in the Senate has greatly increased. Yields on 10-year U.S. Treasuries began to rise rapidly, as shown in Figure 1 below.


figure 1

Bond traders started betting on the Democratic Party to gain control of both houses since the 1.3th, because this meant that subsequent large-scale fiscal stimulus would become possible. Judging from Biden’s policy , inflation will continue to be pushed up. The current Fed’s policy objectives also allow inflation to exceed 2% in the short term, with an average target of 2%, but if it exceeds 2% by a large margin, it will inevitably be Usher in the intervention of the Federal Reserve. Under this inflation expectation, the yield of Treasury bonds has risen, but it should be noted that the rise in interest rates brought about by the rise in inflation expectations is realized by the market based on the Fed’s expectations for inflation management.

Based on this background, when Saudi Arabia announced a unilateral reduction in production in January, crude oil rose sharply in February. The sharp rise in crude oil brought about a further increase in inflation expectations, and due to the impact of the 2020 epidemic, manufacturers stopped production and production. This led to a sharp decline in inventories and the supply and demand gaps of some commodities under the support of fiscal stimulus, which resulted in a sharp rise in commodities, which further pushed up inflation expectations and pushed interest rates higher. It should also be noted that due to the Fed’s countercyclical adjustments that partly distort the trend of Treasury bond yields, until August 7, 2020, the Fed collectively opposed negative interest rates, and the change in the Fed’s attitude led to the return of the Treasury bond market. Previous expectations of further easing by the Federal Reserve restrained the rise in Treasury bond yields, and inflation was the first to be reflected in the market. Nowadays, inflation expectations have peaked. The sharp increase in interest rates corresponds to the sharp increase in real interest rates, and therefore a sharp decline in gold. .

The sharp increase in the far-end Treasury bond yields puts a lot of upward pressure on the near-end Treasury bond yields. Figures 2 and 3 below show the trends of the 2-year U.S. Treasury yield and the 3-year U.S. Treasury yield, respectively. It can be seen that the higher end of the far end has great upward pressure on the near end.


figure 2


image 3

On February 25, the U.S. Treasury Department auctioned $62 billion in 7-year Treasury bonds, but the subscription multiple to measure demand hit a record low of only 2.04, which was much lower than the average subscription multiple of the previous six auctions of 2.35. This decade U.S. bond yields rose rapidly and exceeded 1.6%. This makes the market recall that the Fed’s operation ten years ago was the “distortion operation”-the Fed sold short-term and long-term production to ease liquidity.

The rise of short-term interest rates is not friendly to high-value and highly speculative products. For Bitcoin is we can see that since the outbreak has gone up five times, both of which long-term investment intervention, intervention and short-term speculators, high speculation inevitably bring high turnover, turnover from the point of view, The average turnover rate of Bitcoin is about 5%, and the short-term interest rate rise has limited impact on Bitcoin, but it is still necessary to pay attention to changes in market liquidity. If a liquidity crisis occurs, the demand for supplementary liquidity caused by a sharp drop in other assets It will inevitably lead to the risk of concentrated selling of Bitcoin, which may be unbearable for short-term Bitcoin liquidity, or it will trigger a larger-scale selling. But in the long run, this may provide a good opportunity for retail investors to get in the car, because in the long run, Bitcoin still has the value of holding.

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