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Stabilizing U.S. Treasury Market: Implications for Crypto Investors

Sep 21, 2023 at 10:14 am

Last week, the MOVE index, which gauges turbulence in Treasury notes using options, hit an 18-month low. The U.S. Treasury market, valued at $25 trillion, exudes an unusual calmness despite the Federal Reserve's commitment to maintaining higher borrowing costs. This serenity in the market bodes well for various risk assets, including cryptocurrencies.

The MOVE index, a metric based on options that measures volatility in Treasury notes, registered at 96.61 on Friday, marking its lowest point since the Fed initiated rate hikes in March 2022. As of now, it has plummeted nearly 50% from its peak of 198 earlier in March.

U.S. Treasury debt securities, widely acknowledged as the safest and most liquid global financial instruments, have ascended to the zenith of collateral and securities finance worldwide.

Diminished bond volatility brings stability to leveraged financing, allowing for the reutilization of collateral to generate capital. Essentially, this alleviates liquidity strain in the global market, promoting increased borrowing and portfolio leveraging. This scenario proves beneficial for risk assets such as bitcoin and stocks. Conversely, heightened volatility in the bond market compels leveraged participants to liquidate assets and curtail their exposure to risk. Historically, peaks in the MOVE index coincide with troughs in stock market indexes.

During the recent downturn of the MOVE index, Bitcoin has exhibited resilience. The leading cryptocurrency by market capitalization has seen an increase of over 8% since touching a low below $25,000 on September 11, according to data from Bitsday.

The recent decline in the index contributes to a relaxation of financial conditions, especially as major central banks show no inclination towards swift rate reductions in the near future.

Nonetheless, the index could experience an upswing if an unforeseen shock prompts the unwinding of leveraged short positions in Treasury futures.

The Bank for International Settlements (BIS) cautioned in its latest quarterly report about the current accumulation of leveraged short positions in U.S. Treasury futures, citing it as a noteworthy financial vulnerability due to the potential margin spirals it could induce. According to the BIS, there are approximately $600 billion worth of open short positions in the Treasury market at present.

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