Here's Why Crypto Traders Should Be Attentive to 'De-Inversion' of Treasury Yield Curve

Crypto traders looking for cues on whether bitcoin's (BTC) bull run could continue without disruptions should look at what the U.S. bond market is saying.

Bitcoin has gained over 60% this year, starting the pre-halving bullish period with a bang, CoinDesk data shows. Prices rose to a nine-month high near $29,000 this week, predominantly due to the recent rapid repricing of interest rate expectations lower across the globe.

Still, bulls need to be cautious because the negative spread between yields on 10-year and two-year Treasury notes is beginning to narrow. The gap between the two has reduced sharply by 80 basis points in two weeks and was just 30 basis points short of turning positive at press time.

Historically, the so-called de-inversion or re-steepening of the curve has meant that economic recession – consecutive quarterly contractions in growth rate – is just a few months away, and portended significant drawdowns in stock markets. Bitcoin is seen as both a haven and an emerging technology and tends to move in line with technology when macroeconomic concerns dominate the investor psyche.

"Keep an eye on the yield curve ‘de-inverting’. We’re now getting close. The day that happens after an inversion, the countdown to recession starts in earnest: average of 4 months and median of 2 months," David Rosenberg, founder and president of Rosenberg Research & Associates, tweeted.

Thomas Thornton, founder of Hedge Fund Telemetry, expressed a similar opinion as early as August, saying that "when the curve steepens, recessions happen and stocks fall."

The chart compares the spread between the 10- and two-year yields with Nasdaq going back 1980s. The vertically shaded area represents economic recessions.

The curve has always normalized or re-steepened into recessions, bringing pain to Nasdaq, Wall Street's tech-heavy equity index.

If history is a guide, tech stocks could come under pressure, dragging bitcoin lower if the ongoing de-inversion of the yield curve gathers steam.

Understanding the yield curve

The yield curve is a graphical representation of the relationship between interest rates and the maturities of U.S. Treasury fixed-income securities. Bond yields and prices move in the opposite direction. The curve usually is steep because investors demand higher compensation for lending money for longer durations.

Analysts closely track spreads between long- and short-duration yields to gauge the economic direction. Yields on longer-duration bonds or at long ends mainly represent expectations for economic growth, while those at the short end are more reflective of interest rate expectations.

The curve typically inverts when a central bank raises rates rapidly, as the U.S. Federal Reserve has done over the past 12 months, leading to a sharp rise in the two-year yield relative to the 10-year yield. The latter lags as growth expectations slide due to monetary policy tightening.

Once the negative economic impact of the tightening become evident, markets begin pricing rate cuts. That eventually drives the two-year yield lower relative to the 10-year yield, causing a de-inversion of the spread, a confirmation of recession.

Hence, curve inversion or the spread's negative flip has long been viewed as a sign of pending economic recession and de-inversion a sign the recession has arrived.