On January 3rd, in the East 8 Time Zone, U.S. long-term government bonds experienced a new round of intense fluctuations during trading hours. The yield on the 10-year U.S. Treasury bond surged from above 3.9% to nearly 4.1%, leading to a synchronized repricing of global risk assets, with cryptocurrency assets also experiencing a significant pullback that day. This repricing of interest rates and the bond market is not an isolated technical adjustment, but rather a concentrated reflection of the ongoing conflict between the resilience of the U.S. economy and the stickiness of inflation, following the market's continuous correction of the optimistic expectations of a "soft landing + rapid rate cuts" from the fourth quarter of last year. As the Federal Reserve's first rate cut path continues to be pushed back, bonds, stocks, and cryptocurrency assets are all standing on the same repricing line of the yield curve, with sensitive assets providing the first price feedback.
Sudden Turn in Interest Rate Expectations and Yield Curve
● The repricing of interest rate swaps and federal funds futures indicates that the first rate cut in 2024 has been significantly delayed from March to after May, with the total expected rate cut for the year reduced from the previously bet on over 150 basis points to about 80–100 basis points, showing a clear cooling of market expectations for "rapid easing."
● The yield on the 10-year U.S. Treasury bond, which once surged above 5% in October last year, rapidly fell by about 100 basis points in November and December under the logic of "falling inflation + economic soft landing." However, entering January, the yield tested back above the 4% mark, reflecting that the uncertainty of the inflation decline path is being re-priced.
● Regarding the yield curve, the 2-year to 10-year spread was deeply inverted in 2023, with the inversion reaching nearly -100 basis points. However, as long-term rates fell and short-term expectations for "rapid rate cuts" were corrected, the degree of inversion narrowed, with the market slowly shifting from a narrative of "imminent recession" to a transitional state of "high rates lasting longer."
● Real interest rates (nominal yields minus inflation expectations) saw a significant decline in the fourth quarter, stimulating a substantial rebound in tech stocks and high-beta assets. However, since the beginning of this year, real interest rates have stabilized and risen, suppressing the valuation expansion space of some growth assets and also constraining the pricing of cash flow-less assets.
● As U.S. economic data repeatedly contradicts recession expectations, with non-farm employment, unemployment rates, and service sector PMIs consistently outperforming market expectations, the market has begun to oscillate between "recession triggering rate cuts" and "inflation stickiness forcing high rates to continue," leading to more frequent and intense repricing fluctuations in the yield curve.
How Bond Market Volatility Transmits to Bitcoin and Mainstream Crypto Assets
● Historical backtesting shows a significant correlation between directional changes in U.S. Treasury yields and Bitcoin prices during key windows: when the 10-year yield surged to 5% on October 10, putting pressure on global risk assets, Bitcoin briefly fell to around $26,000 in mid-October. However, during the subsequent one and a half months, as yields fell more than 80 basis points from their highs, Bitcoin's price soared from its lows, peaking near $45,000.
● A high-interest rate environment essentially raises the "threshold price" of risk-free returns, compressing the discounted valuation space of all forward-return assets, including tech stocks and crypto assets. When the 10-year U.S. Treasury bond hovers in the 4%–5% range, institutions require a stronger risk premium to compensate for the allocation to "cash flow-less assets." Once optimistic expectations for the pace of rate cuts are broken, prices often rebalance through rapid pullbacks.
● From a capital flow perspective, during the most crowded phase of "rate cut trades" in the fourth quarter of last year, the sharp drop in U.S. Treasury yields coincided with net inflows into Bitcoin spot and related products, indicating that some hedge funds and macro funds viewed "the peak of interest rates" as a tactical long window for crypto assets. However, at the beginning of this year, as rate cut expectations cooled, some short-term funds in the crypto market also flowed back into more certain short-term government bonds and money market instruments.
● In terms of volatility, the dramatic swings in interest rates and the bond market are often first reflected in interest rate options and bond volatility indices, and then transmitted to the stock and crypto markets through risk parity strategies and cross-asset arbitrage. In October 2023 and January 2024, the rise in U.S. Treasury volatility coincided with an increase in Bitcoin's implied volatility, amplifying the price's response to macro signals in a short time.
● It is important to note that when interest rate expectations undergo drastic adjustments combined with event-driven factors in the crypto market (such as ETF developments, regulatory news, etc.), prices can exhibit a "resonance amplification effect": negative macro factors may not trigger a collapse on their own, but in an environment where sentiment is already optimistic and leverage is high, they can easily become the catalyst for a redistribution of chips.
A New Order of Asset Pricing Amid Macro Cycle Misalignment
This round of repricing in interest rates and the bond market reflects a significant misalignment between the macro economy and asset price cycles. On one hand, U.S. economic data continues to show resilience beyond expectations, with no signs of systemic deterioration in the labor market, and corporate profits still expanding in a high-interest rate environment. This temporarily invalidates the traditional narrative that "rate cuts are necessary to avoid recession." On the other hand, although inflation has clearly fallen from its highs, core inflation remains sticky, with service sector prices and wage growth declining much slower than the market's optimistic expectations from mid-year. In this combination, central banks are forced to strike a more nuanced balance between financial conditions and the current economic reality, and the market has shifted from a linear expectation of "inflation going down will lead to significant rate cuts" to a second-order game regarding "how long high rates will last."
For crypto assets, this misalignment in the macro cycle has created a complex pricing environment. On one hand, high interest rates and relatively high real yields have raised the opportunity cost of capital, weakening the willingness of some speculative funds to price long-term cash flow-less assets. On the other hand, the role of crypto assets in the eyes of some institutions is slowly evolving from purely speculative assets to "hedging fiat currency credit risk" and "insurance against tail risks in the financial system." When the long-term credit of bonds and fiat currencies is questioned, some long-term funds choose to gradually accumulate scarce assets at the end of the high-interest rate cycle, which can provide mid-term support for the crypto market during price declines. Thus, the rhythms of macro and crypto have become misaligned: macro data is good enough to support high rates for longer, yet not sufficient to completely dispel concerns about future recession and debt sustainability. This "stagnant state" can easily manifest in prices as more frequent range-bound fluctuations and false breakouts.
Divergence in Asset Allocation Amid Long and Short Rate Games
Around the trajectory of interest rates and the bond market, there has been a clear divergence between bullish and bearish factions in the market. The bullish camp believes that inflation has already undergone a critical phase of retreat from its highs to a central tendency over the past year, and the slowdown in commodity prices and rent growth will continue to transmit to core inflation. Coupled with the lagging suppression effect of high rates on credit expansion, the U.S. economic growth is likely to slow down significantly in the latter half of 2024. If financial conditions do not loosen appropriately, corporate profits and the job market may show more pronounced cracks. Within this framework, they view current yields as approaching the "high platform" of this cycle, leaning towards increasing holdings of medium to long-term bonds and high-elasticity risk assets, betting on a systematic decline in the interest rate center within the next two years, and viewing high-beta assets like Bitcoin as a "long call option" against the long-term dilution risk of fiat currency.
Conversely, the bearish and cautious camp warns against overestimating the speed and magnitude of the inflation decline. They emphasize that the stickiness of service sector prices and wages has not fundamentally eased, and that fiscal deficits and government debt levels remain high. The Federal Reserve is unlikely to make significant rate cuts hastily while inflation has not firmly returned to target ranges, or it may risk repeating the previous lesson of "easing too early, inflation rebounding." In their view, the market has already overdrawn optimistic expectations for easing in the fourth quarter of last year, and there is a risk of yields and bond prices readjusting to "higher and longer." After a significant rebound, crypto assets are also in a high leverage and sentiment zone, and if the actual pace of rate cuts is slower than expected, prices are likely to correct through sharp declines. Therefore, in the current phase of the game, both sides are engaged in a tug-of-war over "the timing of the first cut," "the total rate cut for the year," and "the probability of a soft landing," with asset prices releasing volatility in back-and-forth movements.
Observational Coordinates for Upcoming Key Macro Nodes
From a trading and allocation perspective, the market will continue to engage around several key coordinates in the short term. The first is the marginal changes in U.S. core inflation and employment data. If CPI and PCE continue to steadily approach the 2% target in the coming months, while the unemployment rate shows a mild upward trend, the policy space for the Federal Reserve to initiate rate cuts will gradually open up, and the high-interest rate term premium will begin to be gradually stripped away in the bond market, which is expected to provide a more favorable macro endorsement for high-beta assets, including crypto assets. The second is the adjustment of policy communication and forward guidance. The Federal Reserve officials' balancing of terms like "higher for longer" and "data-dependent" will be amplified and dissected by the market in each monetary policy meeting and public speech, and the implied paths of federal funds futures and interest rate swaps will be continuously rewritten. This process itself means that asset prices will undergo multiple rounds of volatility releases.
The third is the reallocation rhythm of global funds between bonds, stocks, and crypto assets. When the yield on the 10-year U.S. Treasury bond fluctuates around 4%, some institutions seeking stable returns will choose to lock in yields from medium to high-grade credit bonds and short-duration government bonds, while more aggressive funds will seek excess returns through high-elasticity assets like crypto when macro expectations loosen slightly. For the crypto market, this means that sensitivity to macro data and U.S. Treasury yields will remain high in the foreseeable future, with price responses being quicker and more fragmented. In this environment, a single macro data point is unlikely to be definitive; rather, a series of data, multiple monetary policy meetings, and rounds of market sentiment corrections will collectively shape the next phase of interest rates and asset price landscapes.
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