Bitcoin and ether plunged to multi-month lows on Monday as concerns over a possible US recession gripped financial markets. Investors sought refuge in US Treasuries, which emerged as the day’s winners amid the rush to safe-haven assets.
Bitcoin dropped 13 percent to US$51,560 at its lowest point, while ether fell 17 percent to US$2,277, its lowest level since mid-January. This decline comes despite a positive boost earlier this year from the US Securities and Exchange Commission’s approval of an exchange-traded fund tracking the spot prices of bitcoin and ether.
The recent downturn in cryptocurrencies aligns with a broader selloff in global equities, driven by fears of a looming US recession and rising geopolitical tensions. Bitcoin has lost over a third of its value since reaching a record high in March.
“It’s a big reminder that crypto in general are risk assets and sit at the pointy end of the risk spectrum,” said Tony Sycamore, a market analyst at IG.
Bond traders are increasingly betting that the US economy is deteriorating rapidly enough to prompt the Federal Reserve to ease monetary policy aggressively, potentially before its next scheduled meeting, to stave off a recession. Concerns about elevated inflation have largely subsided, replaced by speculation that economic growth will stall unless the central bank starts lowering interest rates from their more than two-decade high. Traders now see a roughly 60 percent chance of an emergency quarter-point rate cut within a week.
This speculation has fueled one of the biggest bond market rallies since March 2023, when fears of a banking crisis loomed. The policy-sensitive two-year Treasury yield fell by half a percentage point last week to below 3.9 percent, a level not seen so far below the Fed’s benchmark rate (currently around 5.3 percent) since the global financial crisis or the aftermath of the dot-com crash.
The rally extended on Monday, with the 10-year yield hitting 3.7 percent. Expectations for more aggressive easing have spread to other regions, with German yields falling to their lowest in seven months on the view that the European Central Bank will implement larger interest-rate cuts.
“The market concern is that the Fed is lagging and that we are morphing from a soft to a hard landing,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management. “Treasuries are a good buy here; I think the economy will continue to slow.”
Futures traders are now pricing in the equivalent of five quarter-point cuts from the Fed through the end of the year, indicating expectations for significant half-point reductions over its last three meetings. Such downward moves have not been seen since the pandemic or the credit crisis.
Despite these moves, bond traders have often misjudged the direction of interest rates since the end of the pandemic, frequently overshooting and being caught off guard when the economy defied recession calls or inflation expectations. At the end of 2023, bond prices surged on the belief that the Fed would start easing policy, only for those gains to be reversed as the economy showed unexpected strength.
“The market is overshooting and getting ahead of itself like late last year,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. “You need validation from more data.”
This dynamic underscores the volatility and uncertainty currently characterizing financial markets as they navigate the potential economic shifts on the horizon.
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