Crypto propounders have long-hailed bitcoin (BTC) as a haven asset or a hedge against economic and political turmoil and fiat currency malaise.
The hedging properties could be put to the test soon as the U.S. Treasury market is normalizing through a process called “bull steepener,” which has historically preceded economic recessions, a period of sustained weakness in economic output and joblessness.
The U.S. Treasury yield curve plots the yields of different government bond maturities. The curve is normally upward-sloping, with longer-duration bonds offering higher yields than shorter-duration bonds. In mid-2022, the curve inverted, with the two-year yield rising above the 10-year yield. The spread between the 10- and two-year yields dropped as low as -100 basis points in July 2023 before beginning the recovery, often called de-inversion or normalization.
The normalization has gathered pace this month, with the spread rising from -38 basis points to -0.20, primarily due to bull steepening or the two-year yield falling more than the ten-year yield. The two-year yield has declined by 10 basis points to 4.14% this month, thanks to expectations for the Fed rate cuts, while the 10-year yield has risen by eight basis points to 3.94%.
Historically, bull steepeners have been followed by recessions, according to pseudonymous observer The Spread Thread. Investment management firm Lord Abbett said the same in a blog post in October last year.
In other words, the ongoing bull steepening might be a sign of an impending recession.
A drop in consumer and business confidence seen during recessions can result in less demand for assets like bitcoin and technology stocks, although a potential monetary easing by the Federal Reserve to counter the recession and the resulting slide in the dollar index could eventually prove bullish for bitcoin, as it did during the coronavirus-induced recession of 2020.
The vertical shaded lines represent U.S. recessions.