Bitcoin May Benefit as U.S. Treasury Yields Surge 30% in May

Government bond yields, particularly those on U.S. treasury notes, have historically been seen as a challenge for bitcoin (BTC) and other risk assets. However, recent trends in treasury yields suggest a different narrative, one that could be favorable for bitcoin, according to analysts.

The U.S. data released showed that the consumer price index (CPI) rose 0.2% month-on-month for both headline and core in April, below the 0.3% readings expected. This resulted in a headline year-on-year inflation reading of 2.3%, the lowest since February 2021. Despite this, prices for the 10-year treasury yield, which is influenced by inflation, dropped, pushing the yield higher to 4.5%, the highest since April 11. The so-called benchmark yield is up 30 basis points in May alone and the 30-year yield has increased to 4.94%, sitting near the highest levels of the last 18 years.

This trend of elevated yields has persisted despite various economic developments, including tariff pauses and slower inflation. The uptick in the so-called risk-free rate typically sparks fears of a rotation of money out of stocks and other riskier investments, such as crypto, and into bonds. However, the latest yield surge is driven by expectations for continued fiscal expansion during the current administration's tenure.

According to Spencer Hakimian, founder of Tolou Capital Management, the recent drop in bonds on a weak CPI day indicates a significant fiscal expansion. He noted that the fiscal policy under the current administration will likely be just as expansionary as under the previous administration, acting as a tailwind for risk assets, including bitcoin. The details of the tax cut plan proposed $4 trillion in tax cuts and about $1.5 trillion in spending cuts, amounting to a fiscal expansion of $2.5 trillion.

Arif Husain, head of global fixed income and chief investment officer of the fixed income division at T. Rowe Price, noted that fiscal expansion will soon become the overriding focus for markets. He predicted that the 10-year U.S. treasury yield will reach 6% in the next 12–18 months. The persistent elevated Treasury yields represent fiscal dominance and a repricing of U.S. sovereign risk. When the bond market demands higher yields even as inflation falls, it’s not about the inflation cycle; it’s about the sustainability of U.S. debt issuance itself.

Higher yields create a self-reinforcing spiral of higher debt servicing costs, which call for more debt issuance and even higher rates. All this ends up raising the risk of a sovereign debt crisis. Bitcoin, widely seen as an anti-establishment asset and an alternative investment vehicle, could gain more value in this scenario. As yields rise, the Fed and the U.S. government could implement yield curve control, or active buying of bonds to cap the 10-year yield from rising beyond a certain level, let's assume 5%. The Fed, therefore, is committed to buy more bonds every time the yield threatens to rise beyond 5%, which inadvertently boosts liquidity in the financial system, galvanizing demand for assets like bitcoin, gold, and stocks.