The overnight BTC stabilized around 96k. The entire cryptocurrency market also defended strongly, temporarily halting its downward trend. Since September of this year, the Federal Reserve has cut interest rates three times, cumulatively reducing the federal funds rate by 100 basis points, from 525-550 to 425-450.
Unusually, the 10-year U.S. Treasury yield also began to turn upward from September, rising nearly 100 basis points by the end of the year, from about 360 to about 460.
This is a local high in April, as well as the historical high from 17 years ago in 2007.
What happened in 2007 needs no elaboration. That year, the subprime mortgage crisis began to spread in the U.S. and ultimately triggered a financial crisis that swept the globe. In 2008, Satoshi Nakamoto suddenly got inspired and invented Bitcoin.
Now, the Federal Reserve has cut rates by 100 basis points, and U.S. Treasury yields have risen by 100 basis points. A serious divergence. The Federal Reserve's interest rate control seems to have spiraled out of control. The more they cut rates, the higher the market rates!
Friends who understand how the Federal Reserve conducts macro interest rate control – which, to put it bluntly, is intervening in market interest rates – should know that the Federal Reserve's rate hikes and cuts do not directly change market rates, but rather through so-called open market operations to buy and sell U.S. Treasuries, using U.S. Treasuries as a tool to transmit interest rate adjustments to the market.
For example, there are two points in the minutes of the monetary policy meeting in December 2024:
* Conducting standing overnight repurchase agreement operations, with a minimum bid rate of 4.5% and a total operation limit of $500 billion.
* Conducting standing overnight reverse repurchase agreement operations, providing an interest rate of 4.25%, with a daily limit of $160 billion per single trading counterpart. Setting this rate at the lower limit of the federal funds rate target range aims to support the effective implementation of monetary policy and the smooth operation of short-term funding markets.
Bond yields and bond prices have an inverse relationship. Just this point has confused many people.
Can the Federal Reserve issue U.S. Treasuries at an interest rate of 4.25% and buy U.S. Treasuries at a rate of 4.5%, thereby capping market rates at the 425-450 range?
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 rates in the U.S. Treasury market had already dropped to a local low of 360, with an interest rate spread of nearly 2 percentage points in between.
What does this indicate? It indicates that the market is crazily buying U.S. Treasuries, completely ignoring that the Federal Reserve's 'official price' is cheaper.
Of course, the Federal Reserve only conducts transactions with designated large banks, and ordinary people cannot participate directly.
Is the market irrationally optimistic about U.S. Treasuries, or are retail investors being misled by investment advisors into entering the market without understanding?
Do you remember that time, when there were countless posts online promoting U.S. Treasuries and urging retail investors to enter the market?
Looking back at the chart, that wave of public opinion guidance should have been from May to September, corresponding to the downward trend of U.S. Treasury yields. By September, it had come to a close.
With the expectation of rate cuts, the market is rushing ahead; what is the logic? Or rather, what is the sales pitch? It might go something like this: ‘Boss, look, the Federal Reserve is about to open the rate cut channel, why not quickly buy some high-yield U.S. Treasuries for preservation and appreciation? Once this village is gone, there will be no such shop. When the Federal Reserve lowers the rate, only low-yield U.S. Treasuries will be available.’
Unfortunately, the iron law of financial markets is always that making decisions based on others' investment advice leads to either losses or being taken advantage of.
With the rate cut, U.S. Treasuries plummeted. The runners were buried.
What are the reasons for being buried? The logic behind being buried is also very simple, that is, the Federal Reserve cuts rates, and the market goes risk-on, meaning risk appetite rises, capital sells U.S. Treasuries to chase high-risk U.S. stocks, bonds fall and stocks rise, and U.S. Treasury yields rise instead of falling.
But then again, are all capital really so eager and willingly to allocate to high-risk assets?
Or is it being forced by expectations of high inflation in the future?
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