Bitcoin’s long-term bullish outlook may have received further support from investors’ recent bet on long-term Treasury bills.
The Wall Street Journal reported Wednesday that investors believe the Federal Reserve will start buying long-term US bonds after its next meeting in December. The divided outcome of the November 3 election made investors think the central bank would have to take more responsibility to support the US economy.
This is due to the rising number of coronavirus infections, coupled with the inability of the US Congress to pass the second stimulus package for months. A stuck Senate also ensures that American individuals and corporations will have to continue waiting to receive economic aid.
Loans from the future
The minutes of the November 4-5 meeting of the Fed approved the continuation of the existing bond purchase programs. However, it was also recognized that circumstances could cause the central bank to adjust.
The US economy faces uncertain times as US Treasury Secretary Steven Mnuchin decided to end some of the Fed’s key emergency loan facilities that have helped small and medium-sized businesses, as well as state and local governments.
10-year US Treasury bond yields. Source: US10Y on TradingView.com
US 10-year Treasury bond yields. Source: US10Y on TradingView.com
It has also left fewer options for the central bank than to buy long-term US Treasury bills, lowering borrowing costs for businesses and individuals. The Fed is not looking to increase buying short-term government bonds as the yields on these are already close to zero.
In the meantime, Fed officials may also want to wait until December 16 to see whether or not the US Congress can pass a stimulus package. A non-partisan proposal of around $ 908 billion for economic aid has yet to be approved.
The growth of long-term US Treasuries reduces the rate of return they offer – meaning investors get less cash after their bond expires.
Their huge demand means that investors need to buy inflation-resistant assets like Bitcoin. This explains why a return of less than 1 percent for the 10-year U.S. Treasury Department coincided with a 400 percent price rally in the Bitcoin market.
Bitcoin is up more than 160 percent since the start of the year. Source: BTCUSD on TradingView.com
Bitcoin has surged more than 160 percent YTD. Source: BTCUSD on TradingView.com
This is not only because a Treasury Department offers lower returns than Bitcoin, but also because the return it offers may cost much less due to higher fiat inflation later on. Bitcoin, with its limited supply cap of 21 million tokens, protects investors from a devaluation of fiat currencies.