Like Bitcoin While bulls are pinning their hopes on a Federal Reserve (Fed) rate cut to lead to a lasting decline in bond yields and the dollar, bond market signals tell a different story.
The Fed is expected to cut rates by 25 basis points to the range of 3.5% to 3.75% on Dec. 10, continuing the so-called easing cycle that began in September last year. Several investment banks, including Goldman Sachs, expect rates to fall to 3% next year.
An expected decline in interest rates typically weighs on Treasury yields and weakens the dollar index, two factors that support increased risk-taking in financial markets, including cryptocurrencies. But that’s not happening lately.
The 10-year Treasury yield continues to hover above 4% in familiar ranges. Additionally, it is up 50 basis points since the Fed’s first rate cut in mid-September 2024.
The stickiness in Treasury yields likely stems from lingering concerns over fiscal debt and abundant bond supply, compounded by lingering concerns about lingering inflation. Adding to this upward pressure are renewed expectations of a rate hike from the Bank of Japan (BOJ) and the continued rise in Japanese government bond (JGB) yields.
Ultra-low JGB yields seen throughout the 2010s and during the COVID-19 pandemic helped reduce borrowing costs in many advanced economies by exerting downward pressure globally.
The dollar index has also become less sensitive to rate cut expectations, reflecting a change in market dynamics in which these easing signals are fully priced in. Additionally, the relative strength of the US economy is likely supporting the greenback, preventing significant declines despite hopes for looser monetary policy.
The downward trend in the dollar index, which began in April this year and tracks the value of the greenback against major fiat currencies, ran out of steam near 96,000 in September. Since then, the index has rebounded, crossing the 100.00 mark several times.
Taken together, the resilience of bond yields and the dollar index suggests a change in market behavior. The old simple strategy – where dovish signals from the Fed drive yields and the dollar lower, boosting risk assets like Bitcoin – may no longer be valid. Stay vigilant!
