like bitcoin Although bulls are pinning their hopes on Federal Reserve (Fed) rate cuts to fuel a sustained decline in bond yields and the dollar, signals from the bond market tell a different story.
The Federal Reserve is expected to cut rates by 25 basis points to the 3.5%-3.75% range on December 10, continuing the so-called easing cycle that began in September last year. Several investment banks, including Goldman Sachs, expect rates to drop to 3% next year.
An expected drop in interest rates typically weighs on Treasury yields and weakens the dollar index, supporting greater risk-taking in financial markets, including cryptocurrencies. But that’s not happening lately.
The 10-year Treasury yield remains around 4% in familiar ranges. Furthermore, it is up 50 basis points since the Federal Reserve’s first rate cut in mid-September 2024.
The stickiness in Treasury yields is likely due to lingering concerns about fiscal debt and expectations of abundant bond supply, compounded by lingering concerns about sticky inflation.
“As the federal government borrows more, it must issue more bonds, increasing the supply of government debt in the market. Without a commensurate increase in buyer demand, that additional supply could drive up yields and lower government bond prices,” Fidelity explained.
Adding to this upward pressure are renewed expectations of a Bank of Japan (BOJ) rate hike and the continued rise in Japanese government bond (JGB) yields.
The ultra-low JGB yields seen during the 2010s and during COVID helped reduce borrowing costs in many advanced economies by exerting downward pressure globally.
The dollar index has also become less sensitive to expectations of rate cuts, reflecting a shift in market dynamics where these easing signals are fully priced in. Additionally, the relative strength of the US economy is likely supporting the dollar, preventing significant declines despite hopes for looser monetary policy.
The dollar index’s bearish trend, which began in April of this year and tracks the value of the dollar against major fiat currencies, lost steam near 96,000 in September. Since then, the index has bounced around, hitting the 100.00 level a couple of times.
Taken together, the resilience of bond yields and the dollar index suggests a change in market behavior. The old, plain old playbook – where dovish signals from the Federal Reserve drive down yields and the dollar, boosting risky assets like bitcoin – may no longer apply. Stay alert!
