As warning signals flash in the global debt market, Bitcoin has rebounded, exceeding investors' expectations and reshaping the role of BTC in the financial system.
Key Point:
The rise in bond yields reflects growing concerns about fiscal stability and inflation, leading some investors to question the traditional role of U.S. Treasuries as a safe-haven asset.
Bitcoin contradicts traditional risk models; despite a deteriorating macro environment, it has risen, possibly because of the worsening macro conditions.
Amidst a backdrop of increasing global macroeconomic fragility, Bitcoin prices have reached new highs. U.S. and Japanese bond yields are surging, global economic growth is stagnating, and U.S. consumer confidence has fallen to historic lows.
Paradoxically, the macro environment that once threatened Bitcoin's price is now fueling its rise. This shift indicates a broader change in how investors interpret risk and allocate safe-haven assets. At the core of this transformation is the U.S. debt crisis and the soaring U.S. Treasury yields, which were previously considered the safest assets in the world.
Why are U.S. Treasury yields so important?
When U.S. Treasury yields rise, the cost of servicing national debt rises sharply—this is a critical issue as U.S. debt has now exceeded $36.8 trillion, with total interest payments expected to reach $952 billion by 2025.
U.S. President Donald Trump has repeatedly made it clear that lowering yields is one of his top economic priorities. However, achieving this may be much more difficult than he anticipated, as the two most reliable methods to do so require the Federal Reserve's push. Lowering interest rates would reduce the yield on newly issued bonds, making existing high-yield bonds more attractive, thereby raising their prices and lowering their real yields. Another method is through quantitative easing (QE), where the Federal Reserve would purchase large amounts of bonds in the open market, thus increasing demand and lowering yields.
The Federal Reserve is currently resisting both strategies and proceeding cautiously to avoid reigniting inflation, especially amid ongoing tariff wars. Even if Trump finds a legal or quasi-legal way to pressure Federal Reserve Chair Jerome Powell, it could backfire, undermining investor confidence and producing the opposite effect from what is intended.
Investors disapprove of political interference in the foundations of the U.S. and global economy, which their confidence is already fragile. During turbulent times, investors typically flock to government bonds for refuge. But today, the situation is quite the opposite. Investors are selling off U.S. Treasuries, indicating that the problems in the U.S. economy are serious enough to be ignored. The recent loss of the AAA credit rating by the U.S. government is a stark testament to this.
The surge in U.S. and Japanese yields is concerning.
On May 22, the yield on U.S. 30-year Treasury bonds hit 5.15%, the highest level since October 2023, previously reaching a new high since July 2007. Currently, the yield on 10-year Treasury bonds is 4.48%, 5-year bonds yield 4%, and 2-year bonds yield 3.92%.
Since October 2021, the spread between 5-year and 30-year U.S. Treasury bonds has widened for the first time to 1.00%. This indicates that the market is digesting stronger growth momentum, persistent inflation, and an interest rate environment of 'long-term high rates.'
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To make matters worse, Japan is the largest overseas holder of U.S. Treasuries. Japanese investors currently hold $1.13 trillion in U.S. Treasuries, which is $350 billion more than China. For decades, Japanese institutions have invested in U.S. bonds and stocks with low-interest loans—this strategy is known as arbitrage trading.
This era may be coming to an end. In March 2024, the Bank of Japan began raising interest rates, increasing the rate from -0.1% to the current 0.5%. Since April, the yield on Japan's 30-year government bonds has surged by 100 basis points to a historic high of 3.1%. The yield on 20-year bonds has risen to 2.53%, the highest level since 1999.
On May 19, Japanese Prime Minister Shigeru Ishiba even warned the Japanese parliament that the government's deeply indebted condition is 'worse than Greece'—a shocking admission for a country with a debt-to-GDP ratio as high as 260%.
Interestingly, the surge in long-term Japanese bonds has not matched the increase in short-term bonds. The yield on 10-year bonds is 1.53%, while the yield on 5-year bonds is only 1%. As noted by Reuters, this indicates that as the Bank of Japan 'normalizes' interest rates, major Japanese pension and insurance funds are undergoing strategic shifts. These institutions may now be reassessing duration risk and foreign bond exposure, which could pose potential troubles if (or when) they begin to reduce their holdings of U.S. Treasuries.
Will bond volatility continue to affect Bitcoin prices?
As the U.S. continues to grapple with a debt crisis, Japan may also begin to fall into a debt crisis, and the global economy is far from recovering, which could be a good sign for Bitcoin.
Traditionally, rising bond yields drag down risk assets. However, stocks and Bitcoin continue to rise. This divergence suggests that investors may be abandoning traditional strategies. When confidence in the financial system is eroded, even assets perceived as risk-seeking, such as stocks and Bitcoin, begin to shine.
Moreover, between Bitcoin and U.S. stocks, an increasing number of institutional investors are choosing Bitcoin. As noted in the (Kobesi Letter), according to Bank of America data, a net 38% of institutional investors reduced their U.S. stock holdings in early May, marking the lowest level since May 2023.
Meanwhile, according to CoinGlass, the total inflow for Bitcoin spot ETFs continues to grow, with assets under management now exceeding $104 billion, setting a new record. This surge indicates that institutional capital is beginning to recognize Bitcoin not only as a high-performance asset but also as a politically neutral store of value akin to gold. In an increasingly unstable fiat debt economy, Bitcoin is emerging as a reliable alternative, offering a currency system based on predictability and decentralization. Given that its market capitalization is still far below gold's $22 trillion, and even below $5.5 trillion (excluding debt), Bitcoin remains severely undervalued.
Interestingly, the current situation supports two previously contradictory assertions about Bitcoin: it is both a high-yield risk asset and a safe-haven store of value. In a world where an old framework fails, Bitcoin's dual role may no longer be an anomaly but a harbinger of the future.