The Federal Reserve announced rate cuts were coming last month. This has caused Treasury bill yields to fall. The reverse repo program now has a higher yield than bonds and this is again inhaling liquidity.
The Federal Reserve will raise interest rates soon. In the meantime, crypto probably won't do well.
This is according to BitMEX co-founder Arthur Hayes wrote that In a Wednesday blog post, contrary to expectations, market liquidity will be further constrained in the next two weeks ahead of rate cuts.
“Bitcoin will, at best, get cut around these levels and at worst, slowly leak towards $50,000,” Hayes said.
The reason? Funds are exiting Treasury bills and flowing back into the reverse repo program, money raised by the Federal Reserve during the pandemic as part of its quantitative easing program.
The Fed encourages banks to park money in RRP by offering 5.3% interest on their deposits.
But those funds are “sterilized,” Hayes said, because they are “inertia on the Fed's balance sheet, unable to be leveraged back into the global economy.”
The US Treasury can raise funds to exit the RRP by issuing T-bills with higher yields. This increases liquidity in the market and is positive for Bitcoin and other risk-on assets.
T-bill yields fell after Fed Chair Jerome Powell announced on August 23 that it was time for the US central bank to start cutting federal interest rates. Now those yields are much more modest than the yields from RRP.
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“The yield on the RRP will only decrease the day after the rate cut. Therefore, this facility will provide the highest yield from any suitable yielding instrument in the universe between now and September 18,” Hayes said.
As of August 23, it was about $313 billion Stopped At RRP. That figure has now reached $433 billion.
“Bitcoin is the most sensitive instrument tracking dollar fiat liquidity conditions,” Hayes added. “As soon as the RRP started rising to $120 billion, Bitcoin fainted.”
Tom Carreras writes about markets for DL News. Got a tip about the Federal Reserve and Bitcoin? arrive at [email protected]
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