- The Federal Reserve announced last month that rate cuts were coming.
- That caused Treasury bill yields to go down.
- The Reverse Repo Program now has a higher yield than bonds, and it is sucking liquidity in again.
The Federal Reserve will soon be raising interest rates. In the meantime, crypto probably won’t fare well.
That’s according to BitMEX co-founder Arthur Hayes, who wrote in a Wednesday blog post that, contrary to expectations, market liquidity will likely be more constrained over the next two weeks before rate cuts actually hit.
“Bitcoin, at best, will chop around these levels and, at worst, slowly leak lower towards $50,000,” Hayes said.
The reason? Funds are exiting Treasury bills and flowing back into the Reverse Repo Program, a pool of money which the Federal Reserve boosted during the pandemic as part of its quantitative easing programme.
The Fed incentivises banks to park money in the RRP by offering them a 5.3% interest on their deposits.
But those funds are “sterilised,” Hayes said, because they sit “inert on the Fed’s balance sheet, unable to be re-leveraged within the global financial system.”
The US Treasury can coax funds into leaving the RRP by issuing T-bills with a higher yield. This increases liquidity in the market and tends to be positive for Bitcoin and other risk-on assets.
But T-bill yields fell after Fed Chair Jerome Powell announced on August 23 that it was time for the US central bank to begin cutting federal interest rates. And now those yields are more modest than the yield to be earned from the RRP.
“The yield on the RRP will only decline the day after the rate cut. Therefore, the facility offers the highest yield from now until September 18 out of the universe of suitable yield-bearing instruments,” Hayes said.
On August 23, there was almost $313 billion parked in the RRP. That number is now up to $433 billion.
“Bitcoin is the most sensitive instrument that tracks dollar fiat liquidity conditions,” Hayes added. “As soon as the RRP started rising to the tune of $120 billion, Bitcoin swooned.”
Tom Carreras writes about markets for DL News. Got a tip about the Federal Reserve and Bitcoin? Reach out at tcarreras@dlnews.com
