Here’s why crypto traders should be aware of the “de-inversion” of the Treasury yield curve
Crypto traders looking for signals about whether bitcoin’s (BTC) bull run can continue without disruption should look to what the US bond market is saying.
Bitcoin is up over 60% this year, kicking off the bullish pre-halving period with a bang, CoinDesk data shows. Prices rose to a nine-month high near $29,000 this week, largely due to the recent rapid repricing of lower interest rate expectations around the world.
Still, bulls need to be cautious as the negative spread between 10-year and two-year Treasury yields begins to narrow. The gap between the two has narrowed sharply by 80 basis points in two weeks and was just 30 basis points short of turning positive at press time.
Historically, the so-called de-inversion or re-steepening of the curve has meant that economic recessions – successive quarterly contractions in the growth rate – are only a few months away, heralding significant declines in stock markets. Bitcoin is seen as both a safe haven and an emerging technology and tends to move in line with technology when macroeconomic concerns dominate the investor psyche.
“Keep an eye on the yield curve ‘de-inverting.’ We’re getting close now. The day after an inversion, the countdown to recession begins in earnest: 4-month average and 2-month median,” David Rosenberg, founder and president of Rosenberg Research & Associates, tweeted.
Thomas Thornton, founder of Hedge Fund Telemetry, expressed a similar opinion as early as last August, saying: “when the curve steepens, recessions occur and stocks fall.”
The chart compares the spread between the 10- and two-year yields with the Nasdaq back in the 1980s. The vertically shaded area represents economic recessions.
The curve has always normalized or steepened again into recessions, causing pain on the Nasdaq, Wall Street’s tech-heavy stock index.
If history is any guide, tech stocks could come under pressure, dragging bitcoin down if the ongoing de-inversion of the yield curve gathers steam.
The yield curve is a graphical representation of the relationship between interest rates and the duration of US government bonds with interest-bearing securities. Bond interest rates and prices move in the opposite direction. The curve is usually steep because investors demand higher compensation for lending money over a longer duration.
Analysts closely monitor spreads between long-term and short-term yields to gauge economic direction. The interest rates on bonds with longer durations or at long ends mainly represent expectations of economic growth, while at the short end they reflect more interest rate expectations.
The curve is usually inverted when a central bank raises interest rates quickly, as the Fed has done over the past 12 months, leading to a sharp increase in the two-year yield relative to the 10-year yield. The latter is lagging behind as growth expectations fall due to monetary policy.
As the negative economic impact of the austerity becomes apparent, markets begin to cut prices. That eventually drives the two-year yield lower relative to the 10-year yield, causing a de-inversion of the spread, a confirmation of recession.
Therefore, curve inversion or the spread’s negative flip has long been seen as a sign of pending economic recession and de-inversion a sign that the recession has arrived.
