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U.S. Treasury Secretary Janet Yellen issued a warning last week that the country will approach its $31.4 trillion statutory debt ceiling on January 19.
That’s undoubtedly terrifying and may prompt cryptocurrency investors to question the viability of the recent increase in bitcoin (BTC). We are discussing a government that controls the supply of the global reserve currency, the dollar, has reached the maximum amount it can borrow to support its operations, and that government is the one with the greatest economy, the most developed financial markets, and the ability to do so.
Even yet, there is no need to fear because the shutdown won’t happen right away. In order to keep the government operating for at least five months, Yellen has pledged to take “extraordinary measures.” This will allow time for Congress to resolve the impasse and raise the so-called debt ceiling.
Analysts believe that these actions might be beneficial for risky assets, such as cryptocurrency.
According to Treasury Secretary Janet Yellen, her agency will take exceptional steps to buy more time to come to an agreement before a shutdown becomes necessary. It goes without saying that this will involve a cap on the amount of new debt that may be issued. This will decrease the supply of U.S. treasuries, which will, on balance, cause prices to rise and yields to decline. Risk assets benefit from lower rates since they indicate an easier monetary environment, according to Noelle Acheson, author of the well-known book “Crypto Is Macro Now.” “informed CoinDesk in a newsletter.
Bond yields are the cost of borrowing in the economy, and investors’ willingness to take on risk is directly correlated with the availability of affordable credit. The risk appetite increases when returns decrease and vice versa.
Since early 2020, the majority of the movement in equities, cryptocurrencies, and other risky assets has been in the opposite direction of the yield on U.S. Treasury notes (government bonds). The 10-year Treasury yield increased by 153 basis points to 3.88% last year due to the Federal Reserve’s (Fed) quick rate rises, which caused the market value of Bitcoin, the most valuable cryptocurrency, to decline by nearly 60%.
Former CEO of cryptocurrency liquidity provider B2C2 and partner at multi-asset HFT AWR, located in London, Phillip Gillespie, said, Treasury may utilize the $400 billion that is still available in the Treasury General Account (TGA) to break the impasse over raising the debt ceiling. Some believe that this undermines the Fed’s attempts to tighten financial conditions.
The Treasury General Account (TGA) is the federal government’s operating account, which is kept at the Fed. It is used to receive payments from the government as well as tax and customs income, revenues from the sale of securities, and proceeds from the sale of public debt.
On the Fed’s balance sheet, the TGA is a liability that needs to be offset by assets. Cash is taken out of the TGA and transferred to people’s and companies’ bank accounts when the Treasury sends payments. As a result, commercial banks have access to more reserves, which might enhance lending and result in monetary easing across the board for markets and the economy.
“We live in a two-tiered monetary system where entities (mostly commercial banks) who have accounts at the Fed pay each other in special money called central bank reserves, and everyone else transacts in bank deposits. When the TGA decreases, those reserves go into the commercial banking system, and increase the banking system’s reserve assets and bank deposit liabilities,” Fed watcher Joseph Wang said in an explainer.
Assuming the Treasury executes the TGA as planned, it might add liquidity to the market and at least partially offset the Fed’s ongoing quantitative tightening (QT), a process of normalizing the balance sheet and a manner of draining the market of liquidity that has roiled risk assets since June 2022.
All other things being equal, the subsequent injection of money into the system might help to mitigate the liquidity-draining effects of quantitative easing, according to analysts at ING in a study from January 11. This would, in turn, “lower yields” and be another positive event for Treasury securities.
The issue of the US debt ceiling is not new. the U.S. Treasury claims, Since 1960, Congress has moved 78 different times to permanently increase, temporarily extend, or change the definition of the debt ceiling — 49 times under Republican presidents and 29 times under Democratic administrations.
The approaching debt crisis, however, is widely believed to be the most serious since 2011. It frightened investors and caused Standard & Poor’s to reduce the United States’ sovereign rating from AAA (outstanding) to AA+ (excellent).
Before, raising the debt ceiling was never a contentious subject and was always done so. But in 2011, it escalated into a major problem, which had a short-lived negative impact on the economy and resulted in a downgrading of the Federal credit rating. While most politicians should be able to recall that period in history or at the very least understand their recent past, Wes Hansen, director of trading and operations at cryptocurrency fund Arca, suggested that this time might be different because the House Republicans are obviously trying to change things up.
Republicans are interested in setting a spending cap in return for temporarily increasing the debt ceiling, according to CNN, which is what House Speaker McCarthy just informed President Joe Biden. But Biden said he would not engage in negotiations: “It shouldn’t be used as a political football and isn’t. This is not political gamesmanship.”
Some less-tracked conventional market coroners are displaying symptoms of stress. In light of the 2011 debt ceiling crisis, which resulted in a downgrading of the US rating by S&P, the price of 5-year US credit default swaps is presently at its highest monthly average since that time, according to Acheson. Compared to prior deadlocks, markets are tenser this time.
If the impasse continues for an extended period of time, it may spread to other areas of the market and cause cryptocurrency outflows.
It will be awful if we reach the point where the US defaults or the rest of the world thinks there’s a danger we may. If an agreement isn’t reached, the conventional markets will erupt sometime in the upcoming two weeks. Digital assets will be impacted if risk assets actually sell-off.
Similar sentiments were expressed by Richard Rosenblum, co-founder of cryptocurrency trading company and liquidity provider GSR. He added that the likelihood that rationality does not finally win and the U.S. defaults still stays around zero.
As a result, the risk aversion could pass quickly. In addition, the market volatility might hasten the eagerly expected Fed relaxation, according to a note sent to clients on January 13 by Bank of America’s rates research team.
