While cryptocurrency bulls are banking on Fed rate cuts to push bond yields and the U.S. dollar further down, signals from the bond market are telling a different story.
The Federal Reserve is expected to cut interest rates by 25 basis points to a range of 3.5%-3.75% on December 10, continuing the so-called easing cycle that began in September last year. Several investment banks, including Goldman Sachs, expect interest rates to fall to 3% next year.
Anticipated lower interest rates typically impact Treasury yields and weaken the U.S. dollar index, both of which support increased risk-taking in financial markets and bode well for digital assets like Bitcoin , Solana , and others. But that hasn’t happened recently.
The 10-year Treasury yield continues to hover in the familiar range above 4%. In addition, it has risen 50 basis points since the Federal Reserve first cut interest rates in mid-September 2024.
The stickiness in U.S. Treasury yields likely stems from ongoing fiscal debt concerns and expectations of ample bond supply, coupled with ongoing concerns about sticky inflation.
Fidelity explains: “As the federal government gets deeper into debt, it must issue more bonds, thereby increasing the supply of government bonds in the market. If there is not a corresponding increase in demand from buyers, the additional supply could push up government bond yields and prices.”
New expectations of a rate hike by the Bank of Japan (BOJ) and a continued rise in Japanese government bond (JGB) yields have added to this upward pressure.
Ultra-low JGB yields seen in the 2010s and during the coronavirus pandemic have exerted downward pressure globally, helping to suppress borrowing costs in many advanced economies.
The U.S. dollar index has also become less sensitive to interest rate cut expectations, reflecting a shift in market dynamics in which these easing signals have been fully priced in. Additionally, the relative strength of the U.S. economy is likely to support the dollar and prevent it from falling sharply despite hopes of easing monetary policy.
The downtrend in the U.S. Dollar Index, which tracks the value of the U.S. dollar against major fiat currencies, began in April this year, but lost momentum in September as it approached 96.000 points. Since then, the index has begun to rebound, touching the 100.00 mark several times.
Overall, the resilience in bond yields and the U.S. dollar index points to a shift in market behavior. The old, simple strategy — dovish Fed signals drive yields and the dollar lower, boosting Bitcoin and altcoins — may no longer work. Stay alert!
