In recent days, many big players have released content related to U.S. Treasury bonds. Why are they so important? What is their relationship with the crypto world?
Don't think that it's none of your business. It will be too late when the boomerang from your youth hits you.
In simple terms, the price of U.S. Treasury bonds will affect assets represented by Bitcoin, and the specific transmission chain is:
U.S. Treasury bonds are sold off in large quantities - U.S. Treasury bond prices fall, yields rise - purchasing U.S. Treasury bonds with dollars (expectation of Federal Reserve rate cuts) - rising demand for Bitcoin, leading to price increases.
--------
1. Why are U.S. Treasury bonds being sold off in large quantities?
U.S. Treasury bonds are essentially IOUs issued when borrowing from investors. These IOUs promise to repay the principal on a specific date and pay interest at the agreed-upon rate.
For example, a government bond with a face value of $100, an annual interest rate of 3%, maturing in one year, means the holder will receive $100 principal plus $3 interest at maturity, totaling $103.
Countries that export goods to the U.S. and receive a large amount of cash in dollars often buy low-risk U.S. Treasury bonds.
Government bonds do not necessarily have to be held to maturity; they can also be sold in the secondary market for cash. When economic needs arise (such as stimulating domestic consumption or responding to foreign exchange risks), U.S. Treasury bonds may be sold.
--------
2. Why do U.S. Treasury bond prices fall while yields rise?
Interest rate does not equal yield.
When purchasing government bonds, the coupon rate is fixed. For example, a government bond with a face value of $100 and a 3% interest rate will yield $3 in interest at maturity, regardless of what happens after purchase.
Under normal circumstances: spending $100 to buy a government bond with a face value of $100, receiving $103 at maturity, yielding 3% (3 dollars interest ÷ 100 dollars principal).
After the sell-off: when supply exceeds demand, the prices of government bonds will fall. If the market price of government bonds drops to $90, you can buy a bond with a face value of $100 for $90, and still receive $103 at maturity.
At this point, the income is $13, and the yield rises to 14.4% ($13 ÷ $90).
--------
3. Why does the Federal Reserve lower interest rates?
To pay back the principal and interest to investors upon maturity, the simplest method is to issue new government bonds and use the money raised to cover the gap from the previous bonds.
Here comes the question, the yield on maturing government bonds is already 14.4%. Shouldn't the new bonds also maintain a yield of around that, or else no one will buy them?
Assuming the issuance of $100 billion in new government bonds:
Under normal circumstances: when the yield is 3%, the annual interest expense is $3 billion.
After the sell-off: when the yield is 14.4%, the annual interest expense increases to $14.4 billion.
Having to pay so much interest all at once, who can afford it? So the key point is, since the yield increased because someone sold government bonds, if someone buys a large amount of government bonds, will the yield drop?
So the Federal Reserve has started to expand, implementing quantitative easing, which basically means using the money it prints to buy the debts it owes.
In other words, once quantitative easing is implemented, it means that the yields on government bonds may decrease.
--------
4. Why does the price of Bitcoin rise?
To pursue higher returns. Not only Bitcoin, but other crypto assets like DeFi will attract capital inflows as long as the expected returns are higher than those of government bonds. When more people buy, the price naturally goes up.
#USDTreasurySellOff #BTCUSDT