Bitcoin Bulls Bet on Fed Rate Cuts to Drive Bond Yields Lower, but There's a Catch

Monetary Policy and Interest Rates - The U.S. Federal Reserve is expected to cut interest rates by 25 basis points on Sept. 17, lowering the benchmark range to 4.00%-4.25% [1] - Further easing is anticipated, potentially bringing rates down to around 3% within the next 12 months, with the fed funds futures market indicating a drop to less than 3% by the end of 2026 [1] Treasury Yields and Market Dynamics - Bitcoin bulls are optimistic that the anticipated easing will lead to lower Treasury yields, encouraging risk-taking in the economy and financial markets [2] - However, the expected Fed rate cuts may primarily affect the two-year Treasury yield, while long-term yields could remain elevated due to fiscal concerns and persistent inflation [2] Debt Supply and Fiscal Policy - The U.S. government is expected to increase the issuance of Treasury bills and longer-duration Treasury notes to finance tax cuts and increased defense spending, potentially adding over $2.4 trillion to primary deficits over ten years and increasing debt by nearly $3 trillion [3] - The increased supply of debt is likely to pressure bond prices down and lift yields, particularly for longer-term securities [4] Investor Sentiment and Yield Curve - Investors are demanding higher yields for long-term Treasuries due to concerns about inflation and dollar depreciation linked to high debt levels, which may prevent long-term bond yields from falling significantly [6] - The ongoing steepening of the yield curve indicates rising concerns about fiscal policy, as reflected in the widening spread between different maturities of Treasury yields [5]