On September 17, the Federal Reserve is widely expected to cut interest rates by 25 basis points, reducing its benchmark range from 4.00% to 4.25%. Following this move, it is likely to be more easing in the coming months, with prices down to about 3% within the next 12 months. The Fed Fed Funds Futures Market is discounting the decline in Fed fund ratios to under 3% by the end of 2026.
Bitcoin BTC$115,474.08 The bull is optimistic that the expected easing will drive a sharp decline in the Treasury, thereby facilitating an increase in risk-taking in both the economy and financial markets. However, the dynamics are more complex and can lead to results that are significantly different from what you would expect.
The expected Fed rate cut could strain Treasury yields over two years, but financial concerns and sticky inflation could leave people on the long edge of the curve rising.
Debt Supply
The US government is expected to increase the issuance of the Treasury bill (short-term securities), and ultimately increase long-term Treasury bills to fund the Trump administration's recently approved extended tax cuts and increased defense spending package. According to the Congressional Budget Office, these policies could add more than $2.4 trillion to the primary deficit over a decade, but will increase debt of around $3 trillion, or about $5 trillion, when permanent.
An increase in debt supply could raise the price and yield of bonds. (Bonus prices and yields move in the opposite direction).
“The U.S. Treasury's move to issue more memos and bonds will put high pressure on long-term yields,” an analyst at global investment management firm T. Rowe Price said in a recent report.
Financial concerns have already permeated the long-term Treasury bills. There, investors have been demanding higher yields to lend money to the government for over a decade known as the term premium.
The steepest slope of the continuous yield curve – this is reflected in the 10- and 2-year yield expansion, and also expanding between 30- and 5-year yields, and driven primarily by the relative resilience of long-term rates, also indicates that it raises concerns about fiscal policy.
Kathy Jones, managing director, chief and income strategist at Schwab Financial Research Center, expressed the same opinion this month.
These concerns could prevent long-term bond yields from dropping significantly, Jones added.
Stubborn inflation
Since the Fed began cutting in September last year, the US labor market has shown signs of a significant weakness, strengthening expectations for the Fed's cuts and the Treasury's fast-paced yield. However, inflation has been rising recently, complicating the outlook.
When the Fed was cut last September, the inflation rate from the previous year was 2.4%. Last month, it was the highest since 3% reading in January, and 2.9%. In other words, inflation has regained momentum and weakened cases of Fed cuts and lower Treasury yields.
Price relaxation?
Yet yields are already under pressure and likely reflect the market's expectations for Federal Reserve fee cuts.
According to the data source TradingView, 10-year yields fell to 4% last week, reaching its lowest since April 8th. Benchmark yields have been above 60 basis points since May, 4.62%.
A drop to 4% is probably a downside overshoot, according to CFA Padhraic Garvey, head of the US research at ING.
“As the attack on 4% is successful, we see that the 10-year-old Treasury yields are still low. But that's probably an overshoot to the downside. A high inflation print over the coming months could lead to long-term issues and critical adjustments.”
Perhaps speed reductions are priced, repeating the 2024 pattern and could bounce back hard following the September 17th move. The dollar index, as mentioned earlier this week, suggests the same.
Lessons starting in 2024
The 10-year yield fell to 3.60%, above 100 basis points in about five months, leading to interest rate cuts in September 2024.
The central bank made additional fee cuts in November and December. However, the 10-year harvest hit bottom in the September movement, rising to 4.57% by the end of the year, eventually reaching a peak of 4.80% in January this year.
The rise in yields after easing was driven by economic resilience, sticky inflation and financial concerns, according to ING.
As of today, the economy is weakening, but as mentioned earlier, inflation and fiscal concerns have worsened. This means that the 2024 pattern may be repeated.
What does that mean for BTC?
BTC was promoted from $70,000 to $100,000 between October and December 2024 despite rising long-term yields, but this surge was driven primarily by optimism about pro-cryptic regulatory policies under President Trump and increased corporate recruitment of BTC and other tokens.
However, these supportive stories significantly weaken our reflections a year later. Therefore, the potential for potential hardening of yields over the coming months with Bitcoin weight cannot be rejected.
Read: Here are three things that could ruin a bitcoin rally towards $120K
