Yield curve hits historic low, what it means for Bitcoin

by James · April 12, 2023

Thunder, lightning and rain during the summer storm.

Analysts from both traditional financial markets and the Bitcoin market are currently looking at the yield curve with concern and ringing the alarm bells. The 10-year and 3-month yield curve hit another historic low in the US yesterday.

Charlie Bilello, marketing strategist at Creative Planning, drew attention to the historical data via Twitter and shared the chart below. He tired:

The 3-month government rate of 5.08% is now 1.67% higher than the 10-year government rate (3.41%). This is the most inverted yield curve in history.

10 Year – 3 Month Treasury Yield Spread | Source: Twitter @charliebilello

What does an inverted yield curve mean?

Every yield curve inversion in history so far has predicted a recession. But why is that so? Simply put, when shorter-dated bond yields are higher than longer-dated bonds, it means the market is anticipating an economic downturn or recession with lower interest rates.

The inversion of the US 10-year and 3-month Treasury bill yield curve has occurred only four times in the past 100 years. The last three times occurred in 1980, 1973 and 1929. Each time there was a recession that brought the US economy to its knees and caused severe stock market crashes.

In recent weeks, the 10-year 2-year yield curve has already shown a historically negative deviation from the 10-year 3-month yield curve. But as renowned analyst Lyn Alden, founder of Lyn Alden Investment Strategy, recently explained, the 10-3 curve actually has a slightly better track record for predicting recessions and is the original academic study. In late March, Alden noted:

In plain English, the 10-3 curve says “no recession in sight” while the 10-2 curve says, “We’re probably approaching a possible recession, but not confirmed, and probably many months away, but asset prices are starting to peak here. ‘

According to Alden, it was therefore not clear whether there would be an actual hard landing. But the data has now changed fundamentally in just two weeks. The 10-3 yield curve now also screams downturns.

So when does a recession come? Previously, the de-inversion of the curve signaled that an economic recession was a few months away. In recent weeks, the 10-year 2-year yield curve has already started to show an increase, prompting some macro experts to warn of an impending recession.

However, the curve is still far from de-inversion. Predicting when is therefore still like looking into a crystal ball.

10-year treasury constant maturity minus 2-year treasury constant maturity | Source: PEACE

How hard will it hit the financial markets? At the end of March, Jurrien Timmer, director of global macro at Fidelity, wrote that traditional financial markets held for a while in most cases before experiencing moves of -11% to -51% in the months that followed. “Be careful what you wish for when it comes to Fed pivots,” Timmer warned.

What does this mean for Bitcoin?

Therefore, despite Bitcoin’s current rising price, fueled by hopes of an impending pivot, a recession is lurking around the corner. For Bitcoin, this will be the first time it finds itself in a recessionary environment. How the BTC price will react is uncertain – will it disconnect or follow the stock market?

Lyn Alden believes that the financial market is overfunded, so ultimately it comes down to whether assets produce cash flow at reasonable values, and when.

[I]If it’s a monetary commodity like gold or Bitcoin, it depends on how it structurally compares to its competitors like cash deposits and government bonds.

Michaël van de Poppe, founder of Eight Global, mean a recession could push Bitcoin into another sharp decline. Before that, however, the technical analyst predicts a rally towards $45,000 per Bitcoin:

Roughly my thesis for Bitcoin. Still a vacuum where we continue the rally upwards through Q2 as Powell ends his hikes.

Compared to Q2 2019, which also rose significantly. Correction to $25,000 in second half, as recession hits.

Bitcoin Price Prediction | Source: Twitter @CryptoMichNL

At press time, the Bitcoin price was hovering around $30,000. With today’s release of March CPI and the FOMC minutes, the market is in for a volatile Wednesday.