Bitcoin Drops 30% as Fed Rate Cuts Fail to Lower Bond Yields

TLDR

• Bitcoin has fallen 30% from its October peak despite expectations of Federal Reserve rate cuts
• The U.S. 10-year Treasury yield remains above 4%, up 50 basis points since the Fed’s first rate cut in September 2024
• Rising Japanese government bond yields and expectations of a Bank of Japan rate hike are pressuring global bond markets
• The dollar index has proven resilient, bouncing back after reaching 96.000 in September
• Traditional market dynamics where Fed rate cuts boost risk assets like bitcoin may no longer apply

The cryptocurrency market is experiencing turbulence as bitcoin trades around $87,000, down 30% from its peak in October. This decline comes despite the Federal Reserve’s ongoing rate-cutting cycle, which typically supports risk assets.

The Fed is expected to cut rates by 25 basis points to the 3.5%-3.75% range on December 10. Several investment banks, including Goldman Sachs, predict rates will drop to 3% next year.

However, the 10-year Treasury yield continues to hover above 4%. The yield has actually risen 50 basis points since the Fed’s first rate cut in mid-September 2024.

This unexpected behavior stems from ongoing fiscal debt concerns. The federal government must issue more bonds as it becomes more indebted, increasing the supply of government debt in the market.

Without enough demand from buyers, this additional supply drives yields up and prices down on government bonds. Persistent inflation worries are also contributing to the elevated yields.

Japanese Market Impact

The situation is further complicated by developments in Japan. Expectations for a Bank of Japan rate hike later this month have surged after Governor Kazuo Ueda laid groundwork for tightening policy.

Ten-year Japanese government bond yields touched a 17-year peak of 1.88%. Thirty-year yields reached an all-time high before settling slightly after a strong bond auction.

The ultra-low JGB yields seen throughout the 2010s and during COVID had helped suppress borrowing costs globally. The reversal of this trend is now adding upward pressure on yields worldwide.

The yen has strengthened in response to the rate hike expectations. It held at 155.64 per dollar, helping boost the euro briefly above $1.165.

Dollar Resilience

The dollar index has also shown unexpected strength. The downtrend that began in April ran out of steam near 96.000 in September.

Since then, the index has bounced back, reaching the 100.00 level multiple times. The dollar index tracks the greenback’s value against major fiat currencies.

The dollar’s resilience likely reflects the U.S. economy’s relative strength. It also suggests that rate-cut expectations are already fully priced into the market.

Crypto Market Reaction

Bitcoin dropped 5.2% on Monday before recovering slightly. The cryptocurrency bounced 0.6% to trade at $86,965.30 in Asian trading.

Ethereum rose 0.3% to $2,800.42. The mood among cryptocurrency investors ranges between fearful and resigned, according to Jehan Chu, founder of blockchain venture capital firm Kenetic Capital.

The latest drop caught many investors by surprise. Some of the most bullish investors may be preparing to wait out the winter months.

Economic Data

U.S. manufacturing data showed contraction for a ninth straight month in November. This supported expectations for a December rate cut by the Federal Reserve.

However, consumer spending remained strong with a $23.6 billion online shopping spree during the holiday season. This beat analyst expectations.

Some strategists expect the dollar to weaken towards year-end. Deutsche Bank strategist Tim Baker notes that December has been the worst month for the dollar in the past decade.

Gold held steady just above $4,200 an ounce. Brent crude futures remained at $63.17 a barrel following drone attacks on Russian supply.

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