Author: CryptoSlate / Andjela Radmilac

Translation: Deep Tides TechFlow

Deep Tides Introduction: Over the past 20 years, the hedging relationship where U.S. Treasury bonds rise when the stock market falls, and vice versa, has completely failed. Now, both are falling simultaneously, which means the last "shock absorber" in the portfolio has disappeared, and Bitcoin, as the farthest end of risk assets, is facing double pressure.

For the past 20 years, American investors basically enjoyed a form of free insurance: when stocks fell, Treasury bonds rose, thus offsetting losses on one side of the portfolio with gains on the other. This relationship was so reliable that the entire industry designed products around it, and a whole generation of asset allocators took it for granted.

But this mechanism has failed since around 2020 and has not recovered since then.

UBS now calculates that the two-month rolling correlation between the S&P 500 index and the 10-year U.S. Treasury yield is -0.69, the lowest reading since 1996.

This means stocks and bonds are synchronously fluctuating at an unprecedented level in 30 years, and the asset that should have offset stock losses has instead become a source of losses.

If bonds are no longer a safe haven, what is?

It is easy to say that the reason bonds and stocks are becoming similar is that investors have lost confidence in U.S. government debt. But as always, the answer is much more complex. The data tells us that investors still want the safety that bonds traditionally provide, but now they want safety without duration risk.

Duration is the sensitivity of bond prices to changes in interest rates. A 30-year U.S. Treasury bond nominally protects holders from default, but is fully exposed to inflation and policy interest rate paths. Although these are two different risks, this distinction has become less important since the 2008 financial crisis because inflation has essentially been dormant.

Once inflation rises, the hedge fails. The correlation between stocks and bonds depends less on the actual level of inflation and more on the volatility of inflation. It also depends on what is driving the market: news about growth or news about inflation.

When growth is dominant, stocks and bonds respond inversely, because weak growth hurts stocks but benefits bonds. When inflation is dominant, they move in the same direction because higher inflation harms both in the same way. AQR's research finds this explains about 70% of the long-term changes in U.S. stock-bond correlations, with similar results internationally.

Since 2022, inflation has been the dominant factor, and its persistence has lasted longer than we have seen at any time. Even cooler inflation data like June's report—which pulled overall CPI down to 3.5% and brought 30-year long-term yields down to around 5%—has not changed anything because the volatility of inflation is the problem, not any single reading.

The 30-year Treasury yield has breached 5% for the first time since 2007, staying above this line for most of 2026, hovering around 5.1% as of July 16. Earlier this year, a new $25 billion auction of 30-year bonds cleared above 5%, marking the first time in 18 years investors received such high returns on long-term bonds.

The U.S. deficit is expected to expand from about 5.8% of GDP in 2026 to 6.7% in 2036, with net interest payments growing as a share of the economy each year. OECD governments need to raise a total of about $18 trillion this year.

Just as supply increases, foreign demand is thinning. Japanese investors net sold $29.6 billion of U.S. government, agency, and municipal debt in the first quarter, the largest net sell since 2022, as domestic yields finally became worth holding. The Japanese 10-year yield rose to its highest level since 1997, while the German 10-year bond reached a 15-year high. The global buying spree that kept long-end borrowing costs in check for two decades is withdrawing simultaneously in multiple areas, and the term premium is the price of this withdrawal.

All of this tells us that investors are buying dollars, Treasury bills, and short-term bonds, which are highly liquid and carry almost no duration risk. They are selling the long end, as the long end carries all the duration risk. This is a complete turnaround in safe haven trading, which explains why the dollar remains strong during the week when 30-year bonds were sold off.

What position is Bitcoin in?

Bitcoin is now as sensitive to macro conditions as the dollar and gold.

BTC performs well when real yields decline, the dollar weakens, financial conditions ease, and investors seek traditional asset alternatives. An increase in U.S. Treasury yields brings the first three conditions together, which is why the downturn in the bond market eliminates all three supports at once. The rebound that pulled Bitcoin back above $64,000 occurred when a moderate inflation report brought down front-end yields.

Goldman Sachs reached a similar conclusion from another perspective, warning that rising yields have compressed the equity risk premium to a point where investors holding stocks relative to risk-free assets barely receive any compensation. The 10-year U.S. Treasury yield has stayed above this threshold for most of 2026; it only eased to about 4.55% this week after the cooler data.

Bitcoin is further along the same curve than stocks, meaning it absorbs both pressures simultaneously. Higher risk-free yields raise the opportunity cost of holding non-yielding assets. A decline in stocks reduces risk appetite for funding stock positions.

Neither of these are unique issues to cryptocurrency, so they cannot be solved by cryptocurrency-specific news, which is why Washington's regulatory progress has repeatedly failed to support buying this year.

But despite the correlation, this is not a contest between Bitcoin and U.S. Treasuries. Under the inflation risk-off mechanism, they are not competing for anything. They stand on the same side of the same position, selling duration and volatility while accumulating cash. Gold, long-term bonds, and Bitcoin can all fall in the same week while the dollar remains strong, which tells us how much exposure to interest rates and volatility anyone currently wants to hold.

The fiscal situation producing a 5% long-term yield—deficit, interest burden, and weakened foreign buying—is exactly what makes fixed supply assets outside the sovereign credit system attractive to institutional holders.

Some of this capital is already evident in the $15 billion tokenized Treasuries on-chain, which is a bet on yield rather than scarcity. The problem with Bitcoin is that the conditions reinforcing its long-term logic hurt it in the short term.

U.S. Treasuries can reclaim the role they played from 2000 to 2019. This requires a decline in inflation volatility, a return of growth risk as the dominant factor, and sufficient room for the Federal Reserve to ease policy during downturns.

We have seen this combination of factors after every previous inflation shock, and so far nothing excludes the possibility that it will emerge after this one. However, a single month of moderate inflation data is not that combination, even though it is ultimately a data point accumulating in that direction.

Before that, Bitcoin trades in one of the deepest asset classes in the world that no longer represents any market absorbing shocks. This removes the underpinning beneath every risk asset, and the ones that get removed the fastest are those that wait without yielding anything.