A relatively small change in the U.S. government bond market helped set off one of bitcoin's sharpest rallies in months this week, as falling long-term yields gave traders an excuse to unwind a record pile of bearish crypto bets.
The U.S. Treasury said it would double the size of its buyback operations in the longest-dated government bonds, to $4 billion from $2 billion per operation. The announcement helped push the 30-year Treasury yield down from 5.34%, a 19-year high, to around 5.19%.
Bitcoin jumped about 25% since Wednesday and surged past $78,000 as of Asian morning hours Saturday, with roughly $4 billion in bearish crypto positions liquidated on Thursday and Friday as prices rose.
A Treasury buyback involves the government buying previously issued bonds back from investors, a program mainly designed to make older Treasury securities easier to trade and help the government manage the composition of its debt. Importantly, this is no quantitative easing, where the Federal Reserve creates reserves to purchase assets in an effort to loosen financial conditions.
"Mechanically, a buyback is not QE but primarily a tool for managing liquidity and the composition of Treasury liabilities," said Jeff Ko, chief analyst at CoinEx, in a note to CoinDesk. "Given the program's relative small size, I would read this more as a signal, a soft policy put on the long end."
Bond yields had become a growing problem for risk assets. A bond's yield is, in simple terms, the return an investor receives for holding it. When prices of existing bonds rise, their yields fall. When bond prices fall, yields rise.
U.S. government debt is generally treated as one of the safest places investors can put their money. Bitcoin pays no interest simply for holding it, so its return depends largely on the price appreciating.
The more an investor can earn from Treasuries with relatively little risk, the more attractive bitcoin and other volatile assets need to become before that investor is willing to move money up the risk curve.
"Yield could increasingly become Bitcoin's competition," said Hong Yea, co-founder and CEO of Grvt, in an email. "When risk-free yields are high, Bitcoin isn't competing only with other risk assets. It's competing with the return investors can earn for doing very little. That changes the hurdle rate for capital."
"If investors can earn 4-5% in traditional markets, crypto has to offer a much stronger reason for capital to move up the risk curve," Yea said. "When yields fall, that hurdle comes down. Capital becomes more willing to seek growth and risk again, which has historically been a much better environment for Bitcoin."
How long-term rates influence markets
Long-term Treasury influence borrowing costs across the economy and are closely watched as a gauge of how tight financial conditions are. Higher long-term rates can make everything from mortgages to corporate financing more expensive and tend to reduce investors' willingness to own assets whose value depends heavily on future growth or improving liquidity.
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