Rates, Not Crypto: Reading This Week's Bitcoin Move

Advisors hunting for a crypto specific catalyst behind this week’s Bitcoin move will not find one. The driver sits in the rates complex. The minutes of the last FOMC meeting showed a committee more divided, and more restrictive, than the decision it went on to publish, but every print since has cut the other way. Inflation landed benign, payrolls landed soft, and the market has repriced the policy path. Bitcoin is acutely sensitive to liquidity expectations and real yields, so it followed, according to CoinShares’ Research.

The front end has rallied, which is the bond market retiring the idea of another Fed hike. The 30 year has gone the other way, and what it registers is fiscal concern rather than monetary expectation. Bitcoin has historically found that pairing, easing policy expectations set against hardening doubts on debt sustainability, a constructive one. It also means an intervention at the long end reads as dovish.

We are less comfortable with the enlarged Treasury buyback programme than the market appears to be. It purchases relief at the long end without touching the cause, and it is funded by issuing nearer the front. The debt stock ends up with a shorter weighted average life and an interest bill that reprices faster on every front end move. There is circularity in it too. Elevated long yields had been carrying part of the Fed’s tightening; capping them eases conditions instead, raising the odds the Fed holds or moves higher again. Investors have read the programme as yield suppression and marked the dollar lower, which lifts import prices and adds to inflation. Our read is that the problem has been rotated, not solved.