Bitcoin’s Near-Term Prospects Look Bleak As Treasury Yields And Japanese Yen Signal US Recession – Forbes

Treasury Secretary Janet Yellen testifies during a House Committee on Financial Services hearing on the Annual Report of the Financial Stability Oversight Council, Thursday, May 12, 2022 on Capitol Hill in Washington. (Graeme Jennings/Pool photo via AP)

Investors looking for clues on whether bitcoin's recovery from 17-month lows reached last week is long-lasting may want to look at what traditional markets are saying.

The leading cryptocurrency has rebounded after falling to $25,338 on May 12 and was last seen trading above $30,000. While the double-digit bounce is encouraging, it may be too early to say the worst is behind us. The recent sudden trend change in the longer duration Treasury yield and the Japanese yen suggest recession in the US, a risk-off economic condition.

Recessions, consecutive quarterly contractions in the gross domestic product, are bearish for growth-sensitive assets like stocks, industrial metals and risky assets like bitcoin. They are typically bullish for Treasuries (government bonds) and the Japanese yen. Government bonds and currencies of nations like Japan with low-interest rates, a strong net foreign asset position, and deep and liquid financial markets are considered safe havens.

While the crypto community considers bitcoin as digital gold, the cryptocurrency tends to move more or less in line with technology stocks. Bitcoins 30-day correlation with the tech-heavy Wall Street index Nasdaq recently rose to a record 0.82.

Bitcoin remains highly correlated with tech stocks

The 10-year US Treasury yield has turned lower of late, having risen by 150 basis points to 3.20% in the two months to May 9. The benchmark yield was seen at 2.80% at press time, according to charting platform TradingView.

The turnaround comes even as the Federal Reserve (Fed) is expected to accelerate monetary tightening and raise interest rates by 50 basis points at upcoming meets. The central bank is likely to increase borrowing costs to at least 2.25%-2.5% by the end of the year from the current 0.75% to 1%. Further, the central bank is scheduled to start culling assets from its $9 trillion balance sheet in June.

The decline in the longer duration bond yield in the middle of the cycle is perhaps a sign investors are running for safety in anticipation of an economic recession consecutive quarterly contractions in the gross domestic product.

On Wednesday, Goldman Sachs CEO David Solomon told CNBC that investors should prepare to face a contraction in economic activity in the world's largest economy as the Fed withdraws liquidity to contain inflation.

The Japanese yen's (JPY) slide has also ended abruptly despite the Bank of Japan sticking to its accomodative monetary policy amid continued Fed tightening. The yen was trading at 127.20 per US dollar at press time, up 3.15% from the recent low of 131.35 per dollar.

The safe haven yens turnaround says the currency market's focus has shifted from hawkish Fed policy to pricing in recession prospects, just like Treasury yields. Goldman Sachs recently said the Japanese yen is an ideal hedge against recession. The yen has appreciated against the dollar during each of the previous six U.S. recessions, as noted by Capital.com.

Investors are increasingly looking for safe haven assets

All things considered, the macro picture continues to worsen, dampening the odds of a notable price recovery in bitcoin and other risky assets. That said, readers can take heart from the fact that institutional investors are buying the dip, a sign of cryptocurrency's long-term prospects. And the dip demand could restrict losses.

Data tracked by ByteTree Asset Management shows the number of coins held by the U.S. and Canadian closed-ended funds and Canadian and European exchange-traded funds (ETFs) has increased by 6539 BTC since May 3.

"It is encouraging to see some inflows into BTC ETFs, but even more importantly, institutional money is not panicking," ByteTree Asset Management's CIO Charlie Morris told Forbes. "Bitcoin has moved from weak hands to strong.

Institutions are buying more bitcoin despite the market turmoil

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Bitcoin's Near-Term Prospects Look Bleak As Treasury Yields And Japanese Yen Signal US Recession - Forbes