Partnered With:

NewBloc: The impact of the continued rise in US debt on cryptocurrency markets

Read this article in 8 Minutes

As Treasury yields continue to move higher, liquidity is draining away, with high valuations and speculative commodities likely to be the first to be affected.

NewBloc Strategy Analyst Barry has 5 years of experience in the FX gold market.

As US bond yields continue to rise, it has undoubtedly posed a certain threat to global financial assets, and liquidity is gradually waning, which may be the first to be affected by the high valuation and high speculative varieties.

In fact, yields have been bottoming out since August 7. On August 7, 2020, the Federal Reserve meeting, the Federal Reserve officials spoke out against negative interest rates, so the Treasury yield capped the floor, while gold and silver peaked. At that time, the rise of US bond yield did not have a big impact on the financial market. On the one hand, it was because of the excess liquidity in the market, and on the other hand, the US bond yield continued to fall. Until the democratic united, after the two U.S. yields sharply higher, on January 2, 2021 according to the survey, the two candidates for the Democratic Party has slim lead over republican candidate, means become democratic senate majority probability, the corresponding 10-year Treasury yields start rising fast, as shown in figure 1.

Figure 1

Bond traders have been betting since March 3rd that the Democrats will take control of both houses, because that means a big fiscal stimulus is likely to follow. Biden's policies suggest that inflation will continue to rise. The Fed's current policy goals also allow inflation to exceed 2 percent in the short term and average 2 percent, but any significant rise above 2 percent would inevitably lead to intervention by the Fed. Under such inflation expectations, Treasury yields rise, but it should be noted that the rise in interest rates brought by higher inflation expectations is realized by the market based on the Fed's expectations of inflation management.

Based on this background, after the Saudi Arabia announced a unilateral reduction in January, in February, has realized the rally, crude oil rose to bring inflation expectations of higher, and because of the influence of the outbreak in 2020, the manufacturer's determination to keep factories and workers idle lead to sharp decline in inventory, under the support of fiscal stimulus some commodities appeared gap between supply and demand, as a result, commodities sharply upward, further pushing up inflation expectations rise, pushing interest rates higher. It's also worth noting that since the Fed's countercyclical adjustment partly distorted the trend of Treasury yields, it wasn't until August 7, 2020, that the Fed's shift in attitude led to the Treasury market's return. Expectations of further easing by the Federal Reserve had previously kept Treasury yields from rising, while inflation was the first to feed into the market. Now inflation expectations have peaked, and the sharp rise in interest rates corresponds to sharp rises in real interest rates, thus seeing a sharp fall in gold.

The sharp rise in the far end of Treasury yields puts a lot of upward pressure on the near end of Treasury yields. Figure 2 and Figure 3 show the trend of the two-year and three-year Treasury yields, respectively. It can be seen that the rise in the far end puts a lot of upward pressure on the near end.

Figure 2

Figure 3

On February 25th America's Treasury auctioned $62 billion of seven-year notes, but the subscription ratio, a measure of demand, hit a record low of just 2.04, well below the average of 2.35 in the previous six auctions, and the yield on the ten-year note surged above 1.6%. That reminded markets of the Fed's operation a decade ago, known as "Operation Twist", in which the Fed sold short and bought long terms in an effort to ease liquidity.

A rise in short-term interest rates is unfriendly to highly valued, highly speculative commodities. For COINS, we can see already increased by 5 times, since the outbreak of this both for long-term investors, short-term speculators have stepped in, inevitably lead to high turnover rate, high speculation from the turnover rate, the currency roughly the average turnover rate is around 5%, and the rise in short-term rates for the currency impact is limited, but still need to pay attention to the change of market liquidity, in case of a liquidity crisis, and other assets added liquidity on the back of the sharp drop in demand is bound to lead to concentrate on selling the currency risk, this may be for short-term liquidity of the currency cannot afford, or will lead to more large-scale sell-off. But in the long term, it may provide a good opportunity for retail investors to get on board, as there is still value in owning bitcoin in the long term.