10-Year JGB Yields Influence BTC Price Trends
While geopolitical tensions influenced demand for BTC-spot ETFs, rising 10-year Japanese Government Bond (JGB) yields weighed on demand for BTC.
Concerns about Japanese Prime Minister Sanae Takaichi’s fiscal spending plans and Japan’s 240% debt-to-GDP ratio sent the risk premium for holding JGBs higher. Typically, rising yields dry liquidity, weighing on risk assets. On January 23, a hawkish Bank of Japan monetary policy outlook added to the bearish sentiment.
For context, Bitcoin’s inverse correlation with 10-year JGBs remained firmly intact in the current week. Higher 10-year JGB yields and a stronger yen increased the risk of a yen carry trade unwind, as seen in mid-2024.
While the BoJ’s economic forecasts signaled higher interest rates, the neutral rate remains key to yen, JGB yields, and risk sentiment. The BoJ previously indicated that the neutral rate was in the range of 1% and 2.5%.
With an interest rate of 0.75%, a lower neutral rate, neither restrictive nor accommodative, would signal a wider-than-expected US-Japan rate differential, driving yen carry trades. Conversely, a higher neutral rate, potentially between 1.5% and 2.5%, would indicate multiple rate hikes, indicating a narrower-than-expected rate differential.
Yen Carry Trade Unwind Risks
Typically, rate differentials dictate whether yen carry trades are profitable or unprofitable. The wider the rate differential, the more profitable the carry trade into risk assets. BTC’s inverse correlation with 10-year JGB yields underpinned the significance of yen carry trades on market liquidity and demand for Bitcoin.