Will the super bear steepening of the US Treasury yield curve be a blessing or a curse for the cryptocurrency market?

Will the steepening of the US Treasury yield curve benefit or harm the cryptocurrency market?

Author: NingNing, Cryptocurrency Analyst Source: X (original Twitter) @0xNing0x

In the last week of September and the first week of October, there was a phenomenon of a super bear steepening in the US Treasury yield curve.

What is bear steepening?

Bear steepening refers to the phenomenon where the upward speed of long-term US Treasury yield exceeds that of short-term US Treasury yield, and the inversion between the two narrows rapidly within a certain period of time.

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A visualization video of the 2023 US Treasury yield curve changes created by James Eagle shows the entire process of bear steepening in the US Treasury yield curve. The Y-axis in the video represents the bond yield, and the X-axis represents the bond maturity.

What does the occurrence of bear steepening mean?

In general, bear steepening often occurs at the end of the old economic cycle and the beginning of the new economic cycle.

For the current macroeconomic cycle, bear steepening indicates that the US is transitioning from a stagflation period to a recession period.

For the current monetary policy cycle, bear steepening indicates the end of the current tightening cycle and the beginning of a new easing cycle in the US.

For the current market trading logic, bear steepening means a shift from overheated trading to trading recession. For example, the better-than-expected non-farm payroll data released yesterday turned from negative to positive news.

For the current cryptocurrency market, bear steepening means a shift from risk-averse trading logic to risk-taking trading logic, which is beneficial to the cryptocurrency market as a risk asset. In terms of portfolio allocation, there is a shift from mainly allocating BTC and stablecoins to allocating AltCoins with popular narratives.

Various perspectives on this bear steepening:

Janet Yellen: Uncertain about what happened, will closely monitor.

Vice Chairman of the Federal Reserve: This is very bad, considering ending the tightening cycle.

Wall Street Institution A: A sharp drop in risk assets is needed to end the long-term sell-off of US bonds.

Wall Street Institution B: This indicates that the market expects the benchmark interest rate to remain at 4% in the long term.

Based on the various perspectives, the occurrence of bear steepening in the current time period is not welcomed by the US financial authorities, because:

– US inflation data is far from the target of 2%.

– The US tightening monetary policy has put pressure on China, and just when it has achieved some results, it will be forced to retreat.

Summary:

Looking back at the three major cycles in the US financial market since the beginning of the 21st century, after each occurrence of bear steepening, the market enters a phase of trading recession and expectations of interest rate cuts. Risk assets will experience a wave of trading recovery and price rebound during this period. However, this trend will abruptly end after the official interest rate cut, followed by the occurrence of black swan events, market crashes, and circuit breakers.

So what about this round?

It is difficult to give a definite answer now. This is because we don’t know whether the statistical laws based on small samples in long-term predictions can hold. However, we can build an anti-fragile investment portfolio based on this known information to seize the trading opportunities brought by the bear market.

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