As a stalemate in negotiations over raising the US government’s $31.4 trillion debt limit keeps markets dithering, some analysts have disputed the consensus, warning that a potential deal could cause pain for the cryptocurrency market.
The United States reached the legal debt limit of $31.4 trillion on January 19, pressuring the Treasury Department to implement extraordinary measures and shrink the Treasury General Account (TGA) balance to keep the government running. This ensured assets such as bitcoin, which are sensitive to fluctuations in US dollar liquidity, remained in the bid amid fears of a government default and continued interest rate hikes by the Federal Reserve.
TGA’s balance fell from about $500 billion at the beginning of February to $68 billion last week, according to MacroMicro. According to Goldman Sachs, the Treasury’s cash balance is likely to fall to the required minimum of $30 billion in early June, meaning a debt deal must be reached by around that point to avoid what some believe would be a catastrophic default. .
It also means that once the debt limit is raised, the Treasury will consider rebuilding its cash balance by issuing government bonds. This could suck liquidity out of the system and put upward pressure on bond yields as increased issuance tends to push prices down and push up yields. Bitcoin (BTC) is known to move in the opposite direction to bond yields.
Thus, while a potential deal may eliminate significant economic uncertainty, assets like bitcoin that are not tied to the real economy and rely heavily on cash could in fact suffer.
“Issuing debt to fill the coffers will have the opposite effect — money will move from cash and risky assets into US government bonds, especially as yields on these instruments rise to offset the increase in supply,” said Noel Acheson, former head of research at CoinDesk and Genesis Trading and author of the newsletter. Crypto Is Macro Now, in the weekend edition of its newsletter.
“This could be bad for bitcoin and gold, which theoretically fall in price when yields rise (high-yield environments tend not to be good for assets that yield nothing),” she added. “Furthermore, issuing more US government bonds will increase public spending, which will be beneficial to the economy, and will further delay the possibility of interest rate cuts.”
The market consensus so far has been that a default will trigger panic selling and a global rush for cash, similar to what was seen during the coronavirus-induced crash in March 2020 when bitcoin plunged more than 50%. Meanwhile, the debt deal is expected to fuel risk action.
According to some observers, bitcoin attracted safe-haven bids during the March banking crisis, though other price-sensitive assets such as technology stocks also performed well as traders priced in early on by the Fed’s rate cuts. In other words, bitcoin remains a highly liquidity-sensitive risk asset.
Handling that forecast is Satyakam Gautam, a rate trader at India-based ICICI Bank, who expects the Treasury to likely issue $700 billion in bonds in the next two months, triggering massive risk aversion.
“What that means is a shortage of US dollar funding in the short term immediately after successful cap negotiations, if any. Corporate bond markets, as well as private credit, will find it difficult to roll over existing maturities and this will lead to a collapse,” Gautam said in a LinkedIn post. In financing commercial real estate assets or issuers of junk bonds.This could be the real deal breaker that US rate markets have been looking for the elusive.
“There could then be an appreciable drop in long-term interest rates as well as a sharp drop in US interest rates. That would bode well for the safe haven.” [forex] Like the Japanese yen and the Swiss franc.
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