On Sept. 17, the U.S. Federal Reserve (Fed) is widely expected to cut interest rates by 25 basis points, lowering the benchmark range to 4.00%-4.25%. This move will likely be followed by more easing in the coming months, taking the rates down to around 3% within the next 12 months. The fed funds futures market is discounting a drop in the fed funds rate to less than 3% by the end of 2026.
Bitcoin bulls are optimistic that the anticipated easing will push Treasury yields sharply lower, thereby encouraging increased risk-taking across both the economy and financial markets. However, the dynamics are more complex and could lead to outcomes that differ significantly from what is anticipated.
While the expected Fed rate cuts could weigh on the two-year Treasury yield, those at the long end of the curve may remain elevated due to fiscal concerns and sticky inflation.
Debt supply
The U.S. government is expected to increase the issuance of Treasury bills (short-term instruments) and eventually longer-duration Treasury notes to finance the Trump administration’s recently approved package of extended tax cuts and increased defense spending. According to the Congressional Budget Office, these policies are likely to add over $2.4 trillion to primary deficits over ten years, while Increasing debt by nearly $3 trillion, or roughly $5 trillion if made permanent.
The increased supply of debt will likely weigh on bond prices and lift yields. (bond prices and yields move in the opposite direction).
“The U.S. Treasury’s eventual move to issue more notes and bonds will pressure longer-term yields higher,” analysts at T. Rowe Price, a global investment management firm, said in a recent report.
Fiscal concerns have already permeated the longer-duration Treasury notes, where investors are demanding higher yields to lend money to the government for 10 years or more, known as the term premium.
The ongoing steepening of the yield curve – which is reflected in the widening spread between 10- and 2-year yields, as well as 30- and 5-year yields and driven primarily by the relative resilience of long-term rates – also signals increasing concerns about fiscal policy.
Kathy Jones, managing director and chief income strategist at the Schwab Center for Financial Research, voiced a similar opinion this month, noting that “investors are demanding a higher yield for long-term Treasuries to compensate for the risk of inflation and/or depreciation of the dollar as a consequence of high debt levels.”
These concerns could keep long-term bond yields from falling much, Jones added.
Stubborn inflation
Since the Fed began cutting rates last September, the U.S. labor market has shown signs of significant weakening, bolstering expectations for a quicker pace of Fed rate cuts and a decline in Treasury yields. However, inflation has recently edged higher, complicating that outlook.
When the Fed cut rates in September last year, the year-on-year inflation rate was 2.4%. Last month, it stood at 2.9%, the highest since January’s 3% reading. In other words, inflation has regained momentum, weakening the case for faster Fed rate cuts and a drop in Treasury yields.
Easing priced in?
Yields have already come under pressure, likely reflecting the market’s anticipation of Federal Reserve rate cuts.
The 10-year yield slipped to 4% last week, hitting the lowest since April 8, according to data source TradingView. The benchmark yield has dropped over 60 basis points from its May high of 4.62%.
According to Padhraic Garvey, CFA, regional head of research, Americas at ING, the drop to 4% is likely an overshoot to the downside.
“We can see the 10yr Treasury yield targeting still lower as an attack on 4% is successful. But that’s likely an overshoot to the downside. Higher inflation prints in the coming months will likely cause long-end yields some issues, requiring a significant adjustment,” Garvey said in a note to clients last week.
Perhaps rate cuts have been priced in, and yields could bounce back hard following the Sept. 17 move, in a repeat of the 2024 pattern. The dollar index suggests the same, as noted early this week.
Lesson from 2024
The 10-year yield fell by over 100 basis points to 3.60% in roughly five months leading up to the September 2024 rate cut.
The central bank delivered additional rate cuts in November and December. Yet, the 10-year yield bottomed out with the September move and rose to 4.57% by year-end, eventually reaching a high of 4.80% in January of this year.
According to ING, the upswing in yields following the easing was driven by economic resilience, sticky inflation, and fiscal concerns.
As of today, while the economy has weakened, inflation and fiscal concerns have worsened as discussed earlier, which means the 2024 pattern could repeat itself.
What it means for BTC?
While BTC rallied from $70,000 to over $100,000 between October and December 2024 despite rising long-term yields, this surge was primarily fueled by optimism around pro-crypto regulatory policies under President Trump and growing corporate adoption of BTC and other tokens.
However, these supporting narratives have significantly weakened looking back a year later. Consequently, the possibility of a potential hardening of yields in the coming months weighing over bitcoin cannot be dismissed.
Read: Here Are the 3 Things That Could Spoil Bitcoin’s Rally Towards $120K