Bitcoin's Bullish Outlook: Concerns about Rising U.S. Treasury Yields and Fed's Policy Mistake May Be Overblown

Bitcoin's (BTC) latest failure to surpass $70,000 has analysts scrambling for an explanation, with some worrying the ongoing rise in the U.S. Treasury yields could lead to an extended drop. However, the concerns may be overblown, and the path of least resistance for bitcoin remains on the higher side, consistent with the upcoming coveted "golden cross" price pattern. In this article, we will explore the implications of rising U.S. Treasury yields and the Fed's policy mistake on bitcoin's bullish outlook, shedding light on why the worries may be unfounded.

The Rise in U.S. Treasury Yields

The yield on the U.S. 10-year note topped its 200-day simple moving average Monday, reaching a three-month high of 4.26% at press time, according to charting platform TradingView. The benchmark bond yield has surged 60 basis points since the Fed cut rates by 50 basis points on Sept. 18. The rise in the so-called risk-free rate makes bonds more appealing, often sucking out money from relatively riskier assets like cryptocurrencies and technology stocks. Interestingly, bitcoin's ascent ran out of steam on Monday at nearly $70,000, and prices have since retreated to $67,000.

The Perfect Storm for Risk Assets

Pseudonymous analyst The Great Martis, who often describes bitcoin as Nasdaq ETF, sees a perfect storm for risk assets as bond yields surge. Several others see the post-rate cut uptick in the yield as a sign of a policy mistake, comparing the recent outsized 50 basis point rate cut implemented in a non-recessionary environment with the premature easing of 1967. Back then, the central bank cut rates in the face of a tighter labor market, paving the way for broad-based inflation that eventually led to a recession in a couple of years. The fears likely stem from the hotter-than-expected September jobs report and inflation data, which have dented the case for continued Fed rate cuts, adding upward pressure on yields.

TS Lombard's Perspective

"Central banks think policy is tight and want to cut gradually. If employment cracks, they will cut fast. If employment bounces, they will cut less. Two months ago, bonds were pricing a strong possibility of falling behind the curve. Now the recession skew is gone, yields are up. That is not bearish risk assets and it doesn't mean the Fed has screwed up," Dario Perkins, managing direction, global macro at TS Lombard, said in a note to clients on Oct. 17. The research note explained that Fed rate cuts won't restoke inflation as it did in 1967 for several reasons, including the rollover of debt at higher rates, while stressing that the recent rise in Treasury yields is consistent with the past "non-recessionary rate cuts."

Implications for Bitcoin

The chart shows the performance of the 10-year yield in 12 months following the initial rate cut of the past non-recessionary easing cycles. Except for 1984, the 10-year yield hardened after the first rate cut., which means what we are seeing right now is not surprising and may not lead to a significant outflow of money from risk assets and into bonds. Besides, according to the Fed, the neutral interest rate, which is neither stimulatory nor restrictive for economic growth, is currently around 2.5%. With the current target range for the federal funds rate at 1.75% to 2%, there is still room for further rate cuts if needed.

Golden Cross Signaling Bullish Outlook

While rising U.S. Treasury yields may cause short-term volatility in the cryptocurrency market, bitcoin's technical indicators suggest a bullish outlook. The impending golden cross, where the 50-day moving average crosses above the 200-day moving average, is seen as a strong bullish signal. This crossover has historically been followed by significant price increases in bitcoin. Traders and investors are closely watching this golden cross formation, which could potentially lead to a surge in bitcoin's price.

The Crypto Market Resilience

Despite concerns about rising U.S. Treasury yields and the Fed's policy mistake, the crypto market has shown resilience in the face of adversity. Bitcoin's price retracement from $70,000 to $67,000 is seen as a healthy correction rather than a sign of a prolonged downtrend. The overall sentiment in the crypto market remains positive, with institutional investors continuing to show interest in bitcoin and other cryptocurrencies. The increasing adoption of cryptocurrencies by mainstream financial institutions and the ongoing development of decentralized finance (DeFi) projects provide a strong foundation for long-term growth.

Conclusion

While concerns about rising U.S. Treasury yields and the Fed's supposed policy mistake may have caused some uncertainty in the market, the path of least resistance for bitcoin remains on the higher side. The recent rise in Treasury yields is consistent with past non-recessionary rate cuts and may not lead to a significant outflow of money from risk assets like bitcoin. Moreover, bitcoin's impending golden cross formation signals a bullish outlook for the cryptocurrency. As the crypto market continues to show resilience and attract institutional interest, the future looks bright for bitcoin and the broader crypto industry.