Concerns about rising U.S. Treasury yields and Fed’s supposed policy mistake may be overblown, according to TS Lombard.
BTC’s daily chart shows an impending golden cross, signaling bullish outlook.
Bitcoin’s (BTC) latest failure to surpass $70,000 has analysts scrambling for an explanation, with some worrying the ongoing rise in the U.S. Treasury yields could lead to an extended drop.
The concerns, however, may be overblown, and the path of least resistance for bitcoin remains on the higher side, consistent with the upcoming coveted “golden cross” price pattern.
The yield on the U.S. 10-year note topped its 200-day simple moving average Monday, reaching a three-month high of 4.26% at press time, according to charting platform TradingView. The benchmark bond yield has surged 60 basis points since the Fed cut rates by 50 basis points on Sept. 18.
The rise in the so-called risk-free rate makes bonds more appealing, often sucking out money from relatively riskier assets like cryptocurrencies and technology stocks. Interestingly, bitcoin’s ascent ran out of steam on Monday at nearly $70,000, and prices have since retreated to $67,000.
Pseudonymous analyst The Great Martis, who often describes bitcoin as Nasdaq ETF, sees a perfect storm for risk assets as bond yields surge.
Several others see the post-rate cut uptick in the yield as a sign of a policy mistake, comparing the recent outsized 50 basis point rate cut implemented in a non-recessionary environment with the premature easing of 1967. Back then, the central bank cut rates in the face of a tighter labor market, paving the way for broad-based inflation that eventually led to a recession in a couple of years.
The fears likely stem from the hotter-than-expected September jobs report and inflation data, which have dented the case for continued Fed rate cuts, adding upward pressure on yields.
TS Lombard disagrees
London-based macroeconomic research firm TS Lombard disagrees with the narrative.
“Central banks think policy is tight and want to cut gradually. If employment cracks, they will cut fast. If employment bounces, they will cut less. Two months ago, bonds were pricing a strong possibility of falling behind the curve. Now the recession skew is gone, yields are up. That is not bearish risk assets and it doesn’t mean the Fed has screwed up,” Dario Perkins, managing direction, global macro at TS Lombard, said in a note to clients on Oct. 17.
“If someone is making a mistake, it is those who anchor their views on a ‘policy error’ – seemingly irrespective of what authorities do,” Perkins added.
The research note explained that Fed rate cuts won’t restoke inflation as it did in 1967 for several reasons, including the rollover of debt at higher rates, while stressing that the recent rise in Treasury yields is consistent with the past “non-recessionary rate cuts.”
The chart shows the performance of the 10-year yield in 12 months following the initial rate cut of the past non-recessionary easing cycles.
Except for 1984, the 10-year yield hardened after the first rate cut., which means what we are seeing right now is not surprising and may not lead to a significant outflow of money from risk assets and into bonds.
Besides, according to the Fed, the neutral interest rate, which is neither stimulatory nor tight, is in the 2½-3% range – 200 basis points below the present Fed funds rate (the benchmark interest rate) range of 4.75% to 5%.
In other words, the recent rate cut is not necessarily a policy mistake and the central bank “can cut a lot even if the economy is resilient,” according to Perkins.
Note that gold, a zero-yielding traditional safe haven asset, has been setting record highs in the face of rising nominal and real yields, offering bullish cues to perceived store of value assets like bitcoin.
Golden cross
BTC’s 50-day SMA has turned up and looks set to move above the 200-day SMA in the coming days, confirming what is known as the “golden crossover.”
The pattern indicates that the short-term price momentum is outperforming the long-term, potentially evolving into a bull run. The moving average-based indicator is often criticized for being a lagging signal and trapping traders on the wrong side of the market.
While that’s largely true, there have been instances of the Golden Cross presaging major bull runs.
A trader holding BTC for a year following the occurrence of the first two golden crosses and the one in May 2020 would have made triple-digit percentage returns. The cryptocurrency doubled in value to new lifetime highs over $73,000 following the golden cross dated Oct. 30, 2023.
