Crypto Observers Look to Treasury Yields for Cues as Bitcoin Remains Comatose

Bitcoin (BTC) has been trading dead flat since falling by 5% early Friday, and analysts are now looking to U.S. Treasurys for fresh directional cues.

The leading cryptocurrency by market value fell from $23,400 to $22,000 on Friday in a delayed reaction to issues at crypto-friendly Silvergate Bank. Since then, however, both bulls and bears have refused to lead the price action, leaving the cryptocurrency in a narrow range of $22,150 to $22,700, CoinDesk data shows.

The range play may end with a deeper sell-off should Treasury yields extend the February rally, denting the appeal of riskier assets like cryptocurrencies and technology stocks and perceived inflation hedges like gold. A rise in bond yields makes borrowing more expensive and typically sees traders ditch risky assets in favor of fixed-income securities, as seen last year.

"Despite the gloom and doom, crypto continues to hold up extremely well, with BTC staying above $23,000," Singapore-based QCP Capital said in a research note published on Friday. "However, if equities continue to fall and the dollar index and yields continue to move higher, crypto prices might struggle to sustain these levels."

Yields, however, have pulled back slightly from the multi-month highs seen last week, offering relief to risky assets.

At press time, the yield on the 10-year Treasury note stood at 3.94%, down from the four-month high of 4.089% reached last week. The two-year yield, which is more sensitive to expectations for Federal Reserve interest rate hikes, hovered near 4.85%, after it reached a 16-year high of 4.94% on Thursday.

The pullback comes as Atlanta Federal Reserve President Raphael Bostic struck a balanced tone on Thursday, calling for a cautious approach while raising rates to control inflation. The central bank has raised rates by 450 basis points to the 4.5%-4.75% range since March 2022, destabilizing risky assets.

Bostic's tone probably forced rates traders to reassess their recent aggressive repricing of interest rate expectations. The forecasts for peak fed interest rate for the tightening cycle topped 5.5% last week, a notable jump from the 5% seen four weeks ago, according to the fed funds futures.

"Adding to the positive momentum, the Fedspeak this past week has been somewhat balanced. Whilst maintaining the hawkish mantra that they stand ready to keep raising rates should data not show inflation clearly heading back to target, there’s also been a little more caution relative to recent market pricing," David Brickell, director of institutional sales at crypto liquidity network Paradigm, said in Tuesday's edition of Macro Pulse newsletter.

"The Fed’s Bostic perhaps best captured this sentiment in saying, slow and steady is going to be the appropriate course of action," Brickell added, noting the subsequent pullback in yields.

One reason to expect a continued slide in yields is that hedge funds have recently placed record bets on higher two-year Treasury yields. Such extreme positioning is often observed at major turning points. In other words, the yields may be close to topping out, a positive development for crypto and other risky assets.

"According to CFTC data, spec positioning in U.S. Treasurys is now at a record short, surpassing levels last seen in October 2018. U.S. yields topped out shortly after that and is an important consideration here given the negative impact rising yields exerts on risk and crypto," Brickell noted, referring to the Commodity Futures Trading Commission.

That said, the trend in yields largely depends on what Fed Chairman Jerome Powell says during his semiannual testimony before Congress this week and, more importantly, on Friday's jobs report and the February inflation data due on March 14.

Powell is likely to reiterate his commitment to fighting inflation with rate hikes. The hawkish talk, however, may not have much impact on the market, considering interest rate expectations have already been repriced higher.

"Given hawkish market pricing, it's a high bar for Powell to reach," Brickell tweeted. "He's talking to Congress and will need to be more measured with due caution for the downside."