Inflation-adjusted yields, or “real yields”, on US government bonds are picking up pace after an almost three-quarter impasse, sparking fresh risk-taking throughout diverse segments of financial markets. As the rates diverge, speculation over potential backlash on stocks and the broader financial market increases. Even so, crypto enthusiasts remain optimistic, predicting resilience in bitcoin (BTC) and other digital assets.
The five-year real yield rose to nearly 2% recently, surpassing the September 2022 high of 1.92%, which represents a pinnacle not seen since the end of 2008. Meanwhile, the two-year real yield has achieved 3% – a zenith that hasn’t been reached in at least a decade.
A surge in real rates typically slows down economic growth and lessens the allure to invest in riskier or zero-yielding assets such as bitcoin and gold. Traditionally, Bitcoin and Nasdaq’s tech-heavy index exhibit inverse movements in relation to real yields.
However, Richard Usher, Head of OTC Trading at crypto banking firm BCB Group, suggests that the latest dramatic real yield increase is more likely to impact stocks than digital assets.
When reflecting on which type of investor may be drawn towards a one-year bond yield at 6%, Usher believes that most crypto or tech stock investors are seeking higher potential returns or are investing for longer-term growth in their chosen sector or asset class. Thus, he predicts that the real yield rise will pose more difficulties to blue-chip stocks than it will to markets such as technology or cryptocurrency.
The odds seem to be in favor of bitcoin and Nasdaq. Despite real yields reaching their highest levels since 2008, both assets have remained unfazed. This can be accredited to the fact that macro traders, who are meticulous about changes in interest rates and inflation-adjusted bond yields, largely exited the crypto market following last year’s price nosedive.
It’s also important to note that U.S. Treasury inflation-indexed securities are linked directly to inflation as determined by the non-seasonally adjusted U.S. city average all items consumer price index for all urban consumers.
Meanwhile, Ben Lilly, a crypto economist for Jarvis Labs, posits that the increasing real borrowing cost could actually attract more investments into booming sectors like blockchain. Mr. Lilly argues that crypto can boost productivity; as the cost of capital normalizes, funds can be reallocated into sectors that will engender higher productivity in the future. As such, Lilly anticipates that the normalization of yields will infuse more capital into innovative areas such as smart contracts and DeFi.
Wrap up this fiscal fusion with some optimism for the crypto aficionados. As yields normalize and the playing field adjusts, the crypto market continues to stand solid against the changing tides of the broader financial waters. Our fellow HODLers remain unbowed.
Source: Coindesk
