Crypto watchers look to Treasury yields for signals as Bitcoin remains comatose

Bitcoin (BTC) has been trading flat since falling 5% early Friday. Analysts are now looking to Treasuries, or US Treasuries, for new directional cues.

The leading cryptocurrency by market capitalization fell from $23,400 to $22,000 on Friday in a belated reaction to problems at crypto-friendly bank Silvergate. Since then, however, both bulls and bears have refused to lead the price action, leaving the cryptocurrency in a narrow $22,150-$22,700 range, CoinDesk data shows.

The range game could end with a deeper sell-off if Treasury yields extend the February rally, reducing the appeal of riskier assets such as cryptocurrencies and technology stocks and perceived inflation hedges such as gold. A rise in bond yields makes it more expensive to borrow and usually leads traders to ditch risky assets in favor of fixed-income securities, as seen last year.

“Despite the gloom and doom, crypto continues to hold up extremely well, with BTC holding above $23,000,” Singapore-based QCP Capital said in a research note published on Friday. “However, if stocks continue to fall and the dollar index and yields continue to move higher, crypto prices may struggle to maintain these levels.”

However, interest rates have pulled back slightly from the multi-month highs seen last week, providing relief for risk assets.

At press time, the yield on the 10-year Treasury bond was 3.94%, down from a four-month high of 4.089% reached last week. The two-year yield, which is more sensitive to expectations of rate hikes by the Federal Reserve (Fed), hovered near 4.85%, after hitting a 16-year high of 4.94% on Thursday.

The withdrawal comes as Atlanta Federal Reserve President Raphael Bostic struck a balanced tone on Thursday, calling for a cautious approach as he raises interest rates to control inflation. The central bank has raised interest rates by 450 basis points to the range of 4.5-4.75% since March 2022, destabilizing risk assets.

Bostic’s tone likely forced interest rate traders to reconsider their recent aggressive repricing of interest rate expectations. Forecasts for the top Fed rate for the ongoing tightening cycle topped 5.5% last week, a notable jump from the 5% seen four weeks ago, according to Fed Funds futures.

“Adding to the positive momentum, the Fed’s speech over the past week has been somewhat balanced. Although they maintain the hawkish mantra that they are ready to continue raising interest rates if data do not show that inflation is clearly returning to target , there has also been a bit more caution relative to recent market pricing,” David Brickell, director of institutional sales at crypto-liquidity network Paradigm, said in the March 7 edition of the Macro Pulse newsletter.

“Fed’s Bostic perhaps best captured this sentiment by saying that slow and steady is going to be the right course of action,” Brickell added, noting the subsequent decline in yields.

One reason to expect a continued fall in returns is that hedge funds have recently placed record high rates on higher two-year government yields. Such extreme positioning is often observed at major turning points. In other words, returns may be close to peaking, a positive development for crypto and other risk assets.

“According to CFTC data, spec positioning in US Treasuries is now record short, surpassing levels last seen in October 2018. US yields peaked shortly after this and is an important consideration here given the negative impact of rising interest rates on risk and crypto.”, Brickell noted.

That said, the trend in yields depends largely on what Fed Chairman Jerome Powell says during his semi-annual testimony to Congress on Tuesday and, more importantly, on Friday’s nonfarm payrolls report and February inflation data due March 14.

Powell is likely to reiterate his commitment to fight inflation with rate hikes. However, the hawkish talk may not have much impact on the market, considering that interest rate expectations are already repriced higher.

“Given hawkish market prices, it’s a high bar for Powell to reach,” Brickell tweeted. “He’s talking to Congress and will need to be more measured with due caution for the downside.”