On September 17, US Federal Reserve (Fat) is expected to reduce interest rates by 25 basic points, which lowers the benchmark area to 4.00%-4.25%. This step is likely to be followed by more easing in the coming months, taking the rates down to approx. 3% within the next 12 months. Fed Funds Futures Market shuts down a decrease in the FED Fund’s rate to less than 3% by the end of 2026.
Bitcoin Bulls are optimistic that the expected easing will push the Treasury provide heavily lower and thereby encourage increased risk taking across both the economy and the financial markets. However, the dynamics are more complex and can lead to results that differ significantly from what is expected.
While the expected cuts in Fed-rate could weigh on the two-year treasury yield, they may remain elevated at the long end of the curve due to tax concerns and sticky inflation.
Debt Supply
The US Government is expected to increase the issuance of the Ministry of Finance’s bills (short -term instruments) And finally Treasury Treasury Notes to finance the Trump Administration’s newly approved package of expanded tax cuts and increased defense spending. According to the Congressional Budget Office, these policies are likely to add over $ 2.4 trillion to primary deficits over ten years, increasing debt by almost $ 3 trillion or approx. $ 5 trillion if made permanently.
The increased delivery of debt is likely to weigh bond prices and lifting yields. (Bond prices and yields move in the opposite direction).
“The US Ministry of Finance’s possible steps to issue more notes and bonds will press in the longer term,” analysts told T. Rowe Price, a global investment management company, in a recent report.
Financial policy concerns have already stimulated the longer duration funds where investors demand higher dividends to borrow money to the government for 10 years or more, known as the term prize.
The ongoing step of the yield curve is reflected in the expanded spread between 10- and 2-year yields, as well as 30- and 5-year yields and primarily driven by the relative resilience of long-term rates signalizes increasing concern for fiscal policy.
Kathy Jones, CEO and chief income strategist at the Schwab Center for Financial Research, expressed a similar statement this month and noted that “investors require a higher benefit for long -term treasuries to compensate for the risk of inflation and/or depreciation of the dollar as a consequence of high debt levels.”
These concerns could prevent long -term bond yields from falling a lot, Jones added.
Stubborn inflation
Since Fed began cutting reduced on September last year, the US labor market has shown signs of significant weakening, strengthening expectations at a faster pace with cuts in bold rate and a decrease in the Treasury. However, inflation has recently edged higher, which complicates this vision.
When Fed lowered the rates last September, the inflation rate was 2.4%. Last month it was 2.9%, the highest since January’s 3% reading. In other words, inflation has regained momentum, which weakens the case for faster cuts in the fed and a fall in the Treasury.
Ease priced?
The yield has already come under pressure, which probably reflects the market’s expectation of cuts in the Federal Reserve Rate.
The 10-year-old dividend slid to 4% last week and hit the lowest since April 8, according to data source trading. The benchmark yield has fallen over 60 base points from its May high at 4.62%.
According to Padhraic Garvey, CFA, Regional Research Manager, America at Ing, drop to 4% is probably a violation of the disadvantage.
“We can see that 10 years, tax returns that are targeted at ever lower, as an attack of 4% is successful. But it is probably an overrun of the disadvantage. Higher inflation sprints in the coming months are likely to cause long houses some problems, which requires a significant adjustment,” Garvey said in a note to clients last week.
Perhaps rate cuts have been priced in, and the yield can jump hard back after the September 17th movement, in a repeat of the 2024 pattern. The dollar index suggests the same as mentioned early this week.
Lesson from 2024
The 10-year dividend fell by over 100 basic points to 3.60% in about five months until the rate in September 2024.
The central bank provided additional efforts in November and December. Still, the 10-year-old dividend was out with September relocation and rose to 4.57% at the end of the year and eventually reached a high of 4.80% in January this year.
According to Ing, the recovery in the yields after the easing was driven by financial resilience, sticky inflation and tax concerns.
As of today, while the economy is weakened, inflation and tax concerns have deteriorated as discussed earlier, which means the 2024 pattern could repeat itself.
What does it mean for BTC?
While BTC called from $ 70,000 to over $ 100,000 between October and December 2024 despite rising long-term dividends, this increase was primarily driven by optimism about pro-crrypto-legislative policies under President Trump and growing business recording of BTC and other symbols.
However, these supportive tales are significantly weakened by looking back a year later. Consequently, the possibility of a potential curing of yields in the coming months that weighs over Bitcoin cannot be rejected.
Read: Here are the 3 things that can spoil the Bitcoin’s Rally against $ 120,000
