Good morning, and welcome to First Mover, our daily newsletter putting the latest moves in crypto markets in context. Sign up here to get it in your inbox each weekday morning.
Here’s what’s happening this morning:
Market Moves: Bitcoin’s post-Fed bounce stalls, the shape of the Treasury yield curve may keep risk appetite under check.
By Omkar Godbole
Immediate prospects for risk assets, including bitcoin (BTC), look bleak as bond markets question the U.S. central bank’s ability to tighten monetary policy without pushing the economy into recession.
“We’re still in a downtrend market. Bear market rallies tend to be extreme. Until we break out of the down trendline, it’s hard to say the bull market is around the corner,” Kevin Kang, founding principal of BKCoin Capital LP, told CoinDesk in an email. He cited potential yield curve inversion, geopolitical tensions as key near-term risks to risk assets, including bitcoin.
Treasury yield curve inversion occurs when the 10-year yield drops under the two-year yield. The U.S. curve has inverted before each recession since 1955, according to the Federal Reserve Bank of San Francisco.
The curve was just 20 odd basis points short of inverting at press time, having flattened by 70 basis points since early January. So, recession fears will likely linger, keeping risk appetite under check.
“Look at the massive flattening in the 2y10y – it’s signaling that the [Federal Reserve’s] ability to engineer a soft landing is quite narrow,” David Duong, head of institutional research at Coinbase, said, referring to the two-year/10-year Treasury bond spread. “Plus, there’s still a large risk that inflation could remain high and sticky, even with the base effects that could kick in. It’s not immediately clear to me that a terminal rate [peak rate of the tightening cycle] of 2.375% would satisfy that.”
On Wednesday, the Fed raised borrowing costs by 25 basis points and signaled six additional rate hikes for the rest of the year. The U.S. central bank tried to calm market nerves by assuring that the economy was strong enough to absorb seven rate hikes. However, that didn’t help as the two- and 10-year yield gap broke below 19 basis points right after the Fed statement.
“The dot plot showed seven hikes this year, which isn’t a major surprise, but there’s a pretty wide dispersion for next year and the year after, suggesting a lot of uncertainty over the future economic scenario,” Duong noted.
“Overall, I haven’t seen anything that has changed my view that crypto markets will need to see a stabilization period in the next two or three months before a more sustainable recovery can get underway,” Duong added.
Bitcoin jumped 4% to $41,700 on Wednesday. However, the follow-through has been anything but bullish so far. “Market was oversold and saw a lot of short covering across the board,” BKCoin’s Kang said while explaining Wednesday’s rise.