U.S. Bond Market Signals Imminent Test for Bitcoin's Safe Haven Appeal
In recent developments concerning the U.S. Treasury yield curve, signs are emerging that point to a potential economic downturn on the horizon. This has reignited discussions about the merits of seeking refuge in assets renowned for their safe-haven characteristics.
Advocates of Bitcoin (BTC) have consistently championed the cryptocurrency as a haven asset and a hedge against economic and political uncertainties, as well as challenges posed by fiat currencies. However, the effectiveness of Bitcoin's hedging qualities may face scrutiny in light of the ongoing normalization of the U.S. Treasury market through a phenomenon known as a "bull steepener." This historical trend has typically preceded economic recessions characterized by sustained economic weakness and rising unemployment.
The U.S. Treasury yield curve is a vital indicator, plotting the yields of different government bond maturities. Traditionally, the curve slopes upward, with longer-duration bonds offering higher yields than their shorter-duration counterparts. However, a noteworthy inversion occurred in mid-2022, with the two-year yield surpassing the 10-year yield. This inversion reached its nadir at -100 basis points in July 2023 before undergoing a recovery phase known as de-inversion or normalization.
The normalization process has gained momentum in the current month, with the spread transitioning from -38 basis points to -0.20. This shift is predominantly attributed to bull steepening, wherein the two-year yield decreases more than the ten-year yield. Over the same period, the two-year yield has declined by 10 basis points to 4.14%, reflecting expectations of Federal Reserve rate cuts, while the 10-year yield has increased by eight basis points to 3.94%.
Analysts, including the pseudonymous observer The Spread Thread and investment management firm Lord Abbett, point to historical patterns indicating that bull steepeners often precede economic recessions. In simpler terms, the ongoing bull steepening could be considered a cautionary signal of an impending economic downturn.
Despite all the calls for the curve to un-invert through rising long-end yields, looks like the un-inversion is coming through a bull steepener, as it almost always does. Once again, this cycle may not be as different as commonly perceived. pic.twitter.com/p1dqkFtjE9— The Spread Thread (@SpreadThread1) January 12, 2024
During recessions, a typical decrease in consumer and business confidence tends to result in reduced demand for assets like bitcoin and technology stocks. However, there may be a potential positive outcome, as the Federal Reserve could implement monetary easing to counter the recession. This scenario could lead to a favorable outlook for Bitcoin, akin to its performance during the 2020 recession induced by the COVID-19 pandemic.
The vertical shaded lines on the chart provide historical context, representing past U.S. recessions.