Bond Market Blunders Boost Crypto Outlook

By Juan Villaverde

Were you absolutely shocked by the recent U.S. Treasury markets downturn? 

I don’t blame you if you were. Popular wisdom would have you believe bond prices decline because the U.S. economy is having a party and the job market is wearing its best dress. 

The reality is a little less glamorous. 

It's all a game of supply and demand and right now, we're drowning in supply and scrounging for demand. The U.S. government has decided that borrowing big this year is the way to go, especially with an election year coming up.

That has made our fiscal deficit plumper than ever. The Congressional Budget Office says 2023's deficit will hit a casual $1.5 trillion, up from a paltry $1.1 trillion last year. 

Because why save for a rainy day when you can just borrow another umbrella, right? 

But wait, there’s more! Not only is Uncle Sam a fan of creating debt, he’s also got a massive $16 TRILLION refinancing problem over the next 24 months. 

Oh, and if you're expecting a plot twist, there isn’t one. Just a cherry for the top of this fiscal fiasco: Federal Reserve Chair Jerome Powell’s interest rate policy will ensure this debt is refinanced at even higher rates. Bravo! 

Treasury Secretary Janet Yellen has a plan though. Instead of opting for long-term solutions, she’s been borrowing from money market funds by selling short-term, interest rate-sensitive T-bills. She’s already borrowed a cool $1 trillion so far this year.

But this plan isn’t much of a solution. That’s because she can only borrow another $1 trillion from this group, yet she plans on refinancing $1.5 trillion before Christmas. 

This is definitely a case of choosing short-term gains despite the long-term pains. 

Here's some fun math: Over the next two years, the U.S. will need to refinance 45% of its debt, or a whopping $16 TRILLION. 

So, who's picking up the tab? Historically, it’s been China, Japan, and the Federal Reserve. However … 

China, busy with its own economic drama, is now selling U.S. debt like hotcakes. 

Japan has enough debt problems of its own, and no, it’s not buying our bonds anymore. 

The Federal Reserve: Apparently too cool to buy U.S. debt now. 

So, with everyone busy or broke, the entity responsible for bridging the chasm will be the Fed. But not as a buyer! Because remember, it owns the magic money printer. 

As we gear up for 2024, it’s clear that central banks might be back in the business of printing money like it’s going out of fashion. 

And the big beneficiary will be crypto! Because when traditional finance gets messier than a reality TV show, alternative assets become the next big star. 

Get your popcorn ready. 

Alex Benfield’s Notable News, Notes & Tweets

• Su Zhu, co-founder of Three Arrows Capital, the firm that blew up and caused a lot of the contagion in the bear market, was finally arrested today in Singapore.
   
• The impending government shutdown and funding talks could have an impact on the crypto industry, explains Ryan Selkis of Messari.
   
• The first Ethereum (ETH, “B”) futures ETF was approved yesterday, as Valkyrie  is the first firm to offer the ETF service. 
   
• If you thought institutional adoption was limited to ETF applications,just listen to the CEO of Goldman Sachs (GS) talking about the “bright future” of Bitcoin (BTC, “A-”).

What’s Next

It's vital to remember the historical impacts of vast money printing. Whenever central banks resort to extensive quantitative easing, it tends to diminish the purchasing power of fiat currencies. 

Just look back at 2020 and 2021, when unprecedented levels of monetary stimulus were introduced. In fact, more than 40% of the dollars currently in existence were created post-pandemic. 

The result? A significant surge in the price of cryptocurrencies, most notably Bitcoin, as it rose from around $7,000 at the beginning of 2020 to touching almost $65,000 in April 2021. 

With the constant dilution of traditional currencies, many investors look to hard assets or decentralized alternatives as a hedge against inflation and economic uncertainty. 

The bullish sentiment for the crypto market in such times isn't mere speculation — it’s rooted in a historical pattern. 

As the proverbial printing presses heat up once more, the crypto arena stands poised to capture the limelight again, further solidifying its status as the go-to alternative in times of fiscal turbulence. 

So, as the fiscal dance continues, investors would be wise to keep a close eye on how the crypto market moves to the beat.

Best,

Juan