On September 17, the U.S. Federal Reserve (Fed) is anticipated to cut interest rates by 25 basis points, adjusting the benchmark range to 4.00%-4.25%. This decision is expected to pave the way for further easing in the upcoming months, potentially reducing rates to approximately 3% within the next year. Speculation in the fed funds futures market suggests that the fed funds rate could fall below 3% by the end of 2026.
Optimists in the cryptocurrency market, particularly Bitcoin advocates, believe that the anticipated easing will lead to a steep decline in Treasury yields, thereby motivating greater risk-taking in both the economy and financial markets. However, the intricacies of market dynamics suggest that outcomes may differ from expectations.
While the expected rate cuts could exert downward pressure on the two-year Treasury yield, long-term yields might stay elevated, partly due to persistent inflation and fiscal uncertainties. The U.S. government is gearing up to increase the issuance of Treasury bills and longer-duration Treasury notes to finance substantial tax cuts and enhanced defense spending approved during the previous administration. The Congressional Budget Office estimates that these policies could contribute over $2.4 trillion to primary deficits over the next decade, and nearly $3 trillion in additional debt, which could rise to approximately $5 trillion if made permanent.
This surge in debt supply is likely to exert downward pressure on bond prices, consequently elevating yields, as bond prices and yields typically move inversely. Analysts at T. Rowe Price have indicated that the U.S. Treasury’s planned issuance of additional notes and bonds will lead to increased longer-term yields. Concerns surrounding fiscal policy have already infiltrated longer-duration Treasury notes, prompting investors to demand higher yields to compensate for the risks associated with lending money to the government over longer periods.
Kathy Jones, chief income strategist at the Schwab Center for Financial Research, emphasized that investors are increasingly requiring higher yields for long-term Treasuries to offset the risks of inflation and potential depreciation of the dollar, stemming from elevated debt levels.
Despite expectations for Fed rate cuts following signs of a weakening labor market, recent inflation trends have complicated the economic outlook. After the Fed cut rates last September, year-on-year inflation was recorded at 2.4%. However, it has since risen to 2.9%, marking a resurgence that could complicate the case for swift Fed action and a significant drop in Treasury yields.
Market dynamics have already begun reflecting these anticipated rate cuts, as evidenced by the 10-year yield’s decline to 4%—the lowest level since April 8—down more than 60 basis points from its peak in May. Padhraic Garvey of ING noted that the push to 4% may represent an overshoot on the downside, indicating potential upward pressure on long-end yields due to forthcoming inflation data.
Lessons from 2024 indicate a potential trajectory. In the months leading up to the September 2024 rate cut, the 10-year yield fell over 100 basis points to 3.60%. However, subsequent to that move, yields increased significantly—ultimately reaching 4.80% by January. ING analysts have suggested that similar factors—economic resilience, persistent inflation, and fiscal uncertainties—might drive yields up again, despite a currently weakened economy.
For Bitcoin, this economic landscape presents significant implications. The cryptocurrency surged from $70,000 to over $100,000 between October and December 2024, largely propelled by optimism surrounding pro-crypto policies and increased corporate adoption. However, many of these narratives have weakened over the past year, raising concerns that an increase in yields could negatively impact Bitcoin’s performance in the near future as market conditions evolve.
