Bitcoin and S&P 500 face quarterly loss as bonds become most attractive since 2009.

Bitcoin and S&P 500 face quarterly loss as bonds become most attractive since 2009.

The Impact of Bond Yields on Bitcoin and the Stock Market

Bitcoin (BTC) and the S&P 500, Wall Street’s benchmark equity index, are both poised for a decline in the third quarter. This is due, in part, to the decreasing allure of stocks and other risk assets as bond yields have become more attractive, reaching their strongest level since 2009.

Bitcoin, currently trading at $26,100, has seen a 14% decline throughout the third quarter. Similarly, the S&P 500, which serves as a barometer for risk assets including cryptocurrencies, has fallen by nearly 3% during the same period, closing at $4,320.05.

The equity risk premium, defined as the gap between the S&P 500’s earnings yield and the yield on the U.S. 10-year Treasury note, paints a clear picture of the declining appeal of riskier investments. The spread has now reached -0.58, the lowest since 2009. Historically, the spread has averaged around 3.5 points since 2008.

To understand this phenomenon, we need to recognize the appeal of government bonds as safe-haven investments. Treasury securities, backed by the U.S. government, have never defaulted on their debts, making them risk-free assets. The yield on the 10-year Treasury note is considered a benchmark risk-free rate of return against which other asset returns are measured.

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Another striking indication of the diminishing allure of stocks is the declining difference between the S&P 500’s dividend yield and the 10-year Treasury yield, which currently stands at -2.87, the lowest since July 2007.

The enticing yields offered by bonds provide less incentive for investors to put their money into bitcoin. While some proponents consider bitcoin a haven asset akin to digital gold, it has historically acted as a pure play on liquidity, often serving as a leading indicator for stock market movements.

“Bitcoin is a non-yield bearing, risk-on asset. As such, it will be adversely affected by a high USD risk-free rate due to portfolio rebalancing,” explains Alex McFarlane, co-founder of Keyring Network, on LinkedIn. He points out that ignoring the rates markets and treating BTC as an orthogonal portfolio component is not feasible, as BTC cannot offer a risk-free rate like Proof-of-Stake (POS) cryptocurrencies.

To assess the relative attractiveness of stocks and bonds, money managers examine the spread between the earnings yield and the bond yield. The former is the sum of the earnings per share of the index’s component companies divided by the current index level. The latter refers to the return an investor can expect to receive by investing in the index companies.

As bond yields become more appealing, not only does bitcoin struggle to compete, but the entire stock market feels the impact. Investors are compelled to reallocate their portfolios in favor of safer options, which could potentially dampen volatility and have wider implications for the market as a whole.

In conclusion, the decline in bitcoin’s value and the underperformance of the S&P 500 in the third quarter can both be attributed to the rising appeal of government bonds. As bond yields offer a relatively higher return and are considered risk-free, investors are less inclined to invest in risk assets such as cryptocurrencies and stocks. This shift in investor sentiment may continue to influence market dynamics and asset allocation strategies in the coming quarters.