Overnight, BTC stabilized at 96k. The entire crypto market also defended tenaciously, temporarily stopping the decline. Since September this year, the Federal Reserve has cut interest rates three times, reducing the federal funds rate by 100bp cumulatively, from 525-550 to 425-450.
Unusually, the 10-year U.S. Treasury yield also turned upward starting in September, and by the end of the year it had increased by nearly 100bp, from about 360 to about 460.
This was the local high in April and the historical high 17 years ago in 2007.
There is no need to say much about what happened in 2007. That year, the subprime mortgage crisis began to spread in the United States and eventually triggered a global financial crisis. In 2008, Satoshi Nakamoto suddenly got inspiration and invented Bitcoin.
Now, the Fed cuts interest rates by 100bp, and the US Treasury yield rises by 100bp. This is a serious divergence. The Fed's interest rate regulation seems to have gotten out of control. The more it cuts interest rates, the higher the market interest rate!
Friends who understand how the Federal Reserve conducts macro-interest rate regulation - in fact, to put it bluntly, it intervenes in market interest rates - should know that the Fed's interest rate hikes and cuts cannot directly change market interest rates. Instead, it buys and sells U.S. Treasury bonds through so-called open market operations, and transmits interest rate adjustments to the market through the tool of U.S. Treasury bonds.
For example, there are two items in the executive minutes of the December 2024 interest rate meeting:
* Conduct standing overnight repurchase agreement operations with a minimum bid rate of 4.5% and a total operation limit of $500 billion.
* Conduct standing overnight reverse repurchase agreement operations, offering an interest rate of 4.25% and a daily limit of $160 billion per single counterparty. Setting this rate at the lower end of the federal funds rate target range is intended to support the effective implementation of monetary policy and the smooth functioning of short-term funding markets.
The relationship between bond yields and bond prices is inversely proportional. This alone confuses many people.
If the Federal Reserve sells U.S. Treasury bonds at an interest rate of 4.25% and buys them at an interest rate of 4.5%, will it be able to keep the market interest rate in the range of 425-450?
That's not necessarily the case.
For example, before the interest rate cut in September 2024, the Federal Reserve's interest rate control range was still at a historical high of 525-550, but the interest rate in the U.S. Treasury market had fallen to a local low of 360, with a spread of nearly 2 percentage points.
What does this mean? It means that the market is buying U.S. debt like crazy, regardless of the fact that the Fed’s “official price” is cheaper.
Of course, the Federal Reserve only trades with designated large banks, and ordinary people cannot participate directly.
Is the market irrational because it is really optimistic about U.S. bonds, or are retail investors being fooled by investment advisors and entering the game without knowing what is going on?
I still remember that period, when there were a lot of posts on the Internet promoting U.S. debt and urging investors to enter the market.
Looking back at the chart, that wave of public opinion guidance should be from May to September, corresponding to the trend of falling US bond yields. By September, it was already over.
What is the logic behind the anticipation of rate cuts and the market rushing to buy? Or what is the sales pitch? It would probably be like this: Boss, the Fed is about to start cutting rates, why don’t you buy some high-yield US bonds to preserve and increase value? If you miss this opportunity, you will never get it again. When the Fed lowers interest rates, only low-interest US bonds will be available.
Unfortunately, the iron rule of the financial market is that if you make decisions based on other people’s investment advice, you will either suffer a loss or be deceived.
The interest rate cut was implemented, and US bonds plummeted. The frontrunners were buried.
What is the reason for being buried? The logic behind being buried is also very simple, that is, the Federal Reserve cut interest rates, the market risked on, that is, the so-called risk appetite increased, capital sold US bonds to chase high-risk US stocks, bonds fell and stocks rose, and the US bond yield rose instead of falling.
But think about it again, is it true that capital is so excited that it is willing to allocate high-risk assets?
Or is it forced by the expected high inflation in the future?
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