US Treasury Bonds, Dollar, and Bitcoin

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The sizzling inflation and the world’s top central banks’ endeavors to put a leash on it are no secret as they make the headlines every now and then; The battle has become particularly exciting in the world’s first economy as the Federal Reserve, the central bank of the US, has taken extreme measures to bring the inflation rate down. The Fed’s strategy is notably focused on raising the interest rates; they have already raised the rates 5 times this year and have the intention to do more according to Jerome Powell, the chair of the Federal Reserve.

Aside from all the red flags pointing to a looming recession, the strategy has helped the US dollar to gain against major currencies, many of which hold some great deal of the US Treasury bonds in their reserves. Bank of Japan, for instance, holds $1.2 trillion in US Treasury Securities, with China taking second place with its $971.8 billion holding.

But why are the US treasury securities an important measure for traders and investors to keep an eye on? Can central banks use this holding in their favor and if so, how? And last but not least, how would it affect the US dollar or even the Bitcoin market, for that matter?

US Treasury Securities

The US Treasury securities are issued by the government as a way to raise money to support its operations. By investing in US Treasury bonds and other securities, investors can earn relatively stable interest rates that can last up to 30 years. At the same time, the government can cover its budget deficiencies using the earnings from the sales of such instruments.

This approach is known as a loosening monetary policy as it expands the balance sheet of the central bank and is usually used as a way to stimulate the economy as we’ve seen many times during the Covid-19 pandemic. However, like any other policy, this can become troublesome if not controlled properly, leading to inflation.

That’s exactly what happened in the US market. The extreme expansion of the money supply caused the inflation rate to increase, forcing the government and the central bank to look for remedies.

In such a situation, raising interest rates is the go-to option for many central banks to bring down prices by taming spending but the market didn’t expect the authorities to get addicted to this medicine. And at the moment, it seems like the US dollar is the one enjoying the highs more than any other currency in the market.

The Rising US Dollar: Sell the Bonds, Save the Yen

The Japanese Yen is probably one of the most affected currencies as it fell to a 32-year low against the US dollar. Shunichi Suzuki, the finance minister of Japan, announced that the government will take necessary actions to help its fallen currency. But unlike the Federal Reserve, the Bank of Japan finds no fun in raising the interest rates to make its currency more appealing to investors. They rather sell their share of US Treasuries, as the world’s largest holder, with $1.2 trillion sitting in their reserves. 

But that’s not all Japan has in its arsenal right now. The world’s third-largest economy also has an estimated $100 billion parked at a repo facility in the Fed which they can tap into whenever they wish to intervene in the FX market. Actually, the BoJ has already got their hands dirty; Based on the reports, Japan dumped $20 billion in late September to protect its currency against the strengthening US dollar.

But how far is BoJ willing to go with its “Selling-dollar, Buying-yen” strategy? We probably have to wait and see but one thing is for sure; it indeed has a huge load of dollars to keep itself busy, at least for the near future.

What It All Means For Bitcoin

The US dollar positioning itself as a safe-haven asset has caused many investors to exit the high-risk markets and invest in the US dollar. And even though promoted as a hedge against inflation, Bitcoin has been considered a risky investment by many market members.

If Japan’s interventions could put a stop to the US dollar’s consecutive gains, we may see other asset classes, like Bitcoin, recover from their recent losses. On the flip side, however, a stronger dollar could simply bring more downward pressure on Bitcoin price.

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