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OCTOBER 13, 2023


David Duong, head of institutional research at Coinbase Institutional, believes that the market has already priced in the potential approval of spot-based bitcoin exchange-traded funds (ETFs) as expectation of these ETFs has caused bitcoin to outperform other cryptocurrencies in recent months. Notably, the spot-based BTC ETFs applications made by major financial players like BlackRock have led  an 8% increase in bitcoin’s value and a 7.5% drop in ether, the second-largest cryptocurrency. In addition, the correlation between cryptocurrency prices and the term structure of the U.S. Treasury yield curve varies between bitcoin and ether, as while Bitcoin displays a weaker correlation, ether demonstrates a stronger inverse relationship. This performance deviation between the two currencies began in mid-June, coinciding with the filing of multiple spot bitcoin ETFs. Looking ahead, the future performance of bitcoin, remains uncertain if the U.S. Securities and Exchange Commission (SEC) approves the ETFs, as despite bitcoin’s initial response to the spot bitcoin ETF applications, the implications of SEC approval remains unclear.


The latest report from the Labor Department indicates that the number of Americans applying for unemployment benefits remained unchanged last week, demonstrating the ongoing strength of the job market despite higher interest rates. With 209,000 new claims for unemployment benefits and a four-week average of 206,250, the figures suggest that American workers continue to enjoy exceptional job security. Furthermore, despite initial predictions of a looming recession as the Federal Reserve raised interest rates to combat inflation, the economy and job market have proven resilient, easing inflationary pressures while maintaining robust hiring. This positive trend has raised hopes that the Fed can effectively manage a “soft landing” by curbing inflation without causing an economic downturn.


The swiftest tightening of U.S. monetary policy in 40 years, aimed at combatting inflation, has markedly bolstered the performances of Citigroup, JPMorgan, and Wells Fargo. Wells Fargo, for instance, reported an 8% increase in net interest income, reaching $13.1 billion in the third quarter, demonstrating its confidence by instituting a $30 billion share buyback program. Similarly, JPMorgan Chase’s profit surged to $13.15 billion, largely due to higher interest rates and an acquisition that added $173 billion of loans to its balance sheet, resulting in an impressive 30% boost in net interest income. Additionally, Citigroup also outperformed Wall Street’s expectations, with a robust 9% increase in revenue and a 2% rise in net income, driven by solid performance in both institutional clients and personal banking. Moreover, following these results, we can see that despite the various challenges the banking sector faces, these banks have thrived and adapted effectively.


The Federal Reserve has put forth a new theory suggesting that the bond market is effectively managing monetary conditions, allowing the Fed to hold off on raising interest rates further this year. This viewpoint, supported by various policy makers, argues that the recent increase in the term premium, or the gap between Treasury yields and future interest rate projections, is tightening monetary conditions and slowing down the economy similar to a rate hike. However, there are concerns with this theory. Firstly, the higher term premium is likely due to increased government borrowing, which should actually boost the economy. Secondly, it is risky for the Fed to be driven by market influences when it comes to raising or not raising rates. Lastly, the Fed did not respond in the opposite manner when bond yields were declining last year, so why do so now? It is important to distinguish between the term premium and economic developments. The term premium is essentially the reward for taking the risk of investing in Treasury bonds. If the riskiness of buying Treasurys increases, it can slow down the economy similarly to a rate hike. However, it matters why the term premium has increased. When the government borrows more, resulting in higher Treasury yields, it can offset the boost to the economy from increased spending. Overall, the Fed reacting to market movements rather than the other way around is not desirable, and while it is inevitable that the Fed must respond to market conditions, trying to fine-tune policy based on small fluctuations in bond yields is too precise. Lastly, why is this a concern now? Last winter, bond yields sharply fell and stocks rebounded, countering the Fed’s efforts to tighten monetary policy.


Euro area long-dated yields in the bond market have experienced a significant drop this week – the largest since early-June, as concerns over the Middle East conflict spreading led to investors rushing towards safe-haven assets. Consequently, Germany’s 2-year yield, which is sensitive to policy rate expectations, fell to 3.4%, while the 10-year government bond yield decreased to 2.72%. In addition, Italy’s 10-year yields, which is the benchmark for the euro area’s periphery, also dropped to 4.74%. Moroever, the yield curve has steepened in both Europe and the U.S., reflecting expectations of high policy rates for an extended period. Nevertheless,  there is a 10% chance of an additional ECB rate hike by the end of the year, and since the European Central Bank has indicated that their tightening cycle may be over, short-term borrowing costs have remained steady.

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