I don’t know what the fuck Treasuries are doing. By late Friday morning, the U.S. ten-year yield was around 5.22%, after touching 5.23%, its highest level since 2007. Wednesday had already delivered its biggest one-day increase in more than a year. Stronger business-activity data, inflation concerns and a poorly received Treasury auction all contributed to the selloff. Japan’s ten-year government bond yield also reached its highest level in thirty years. Bitcoin displayed surprising stability when Wednesday’s data hit, initially pulling back only about $2,000, or 2.3%, from roughly $87,000 to $85,000.
The straightforward explanation is that interest rates can be pro-cyclical. When investors become more optimistic about economic growth and business earnings, equities become more attractive relative to government bonds. Investors rotate toward risk, the bid for Treasuries weakens, bond prices fall and yields rise. Treasuries have to offer a higher return to compete with the opportunities investors see elsewhere. In a growth-driven expansion, that is normal. Rising yields can reflect confidence in the economy.
Another explanation, which seems more popular among bitcoiners, is that something much more serious is going on. Investors may be demanding more compensation for inflation and the sheer volume of government debt coming to market. Rising yields in Japan add another source of pressure, while higher mortgage rates make the average homebuyer want to puke. Borrowing costs can rise far enough to damage the economy, even if the initial move began with stronger growth.
Some people in bitcoin seem to be rooting for economic collapse. I am not sure whether their interpretation of this move is right or wrong, but the more ordinary explanation deserves consideration too. Bitcoin might be sniffing out the next wave of liquidity, or this is just a classic pro-cyclical move in rates and the economy is in better shape than people give it credit for. Who knows?