Bitcoin’s 43% quarterly gain faces 5% Treasury yield test

Bitcoin gained 43% in the third quarter, its strongest quarterly performance since 2017, according to Delphi Digital. The cryptocurrency also rose for a third straight week last week, briefly trading above $87,000 before retreating.

Delphi Digital described the advance as facing resistance from higher government bond yields and the Federal Reserve’s September rate increase. Treasury yields above 5% may lead investors to demand higher potential returns from riskier assets, according to the research firm’s latest weekly newsletter.

Bitcoin has gained more than 35% since mid-August, shortly after the US Treasury announced plans to double buybacks of long-term debt, including 10- and 20-year notes. The buybacks have since tripled in size.

Some investors viewed the Treasury purchases as an effort to improve liquidity in the bond market and reduce pressure on borrowing costs. Higher yields have increased the appeal of government debt compared with assets such as Bitcoin.

Bitcoin has also drawn interest from the so-called debasement trade. The strategy is based on the expectation that sustained government borrowing and currency expansion will reduce the dollar’s purchasing power. Vanessa Grellet, managing partner at crypto-focused venture firm Arche Capital, said the strategy does not depend on low interest rates because investors are paying more attention to US budget deficits and rising government interest payments.

The outlook for another Federal Reserve rate increase became less likely after weaker-than-expected employment data. The US economy added 29,000 jobs in September, compared with forecasts for 80,000, according to the Bureau of Labor Statistics. The report provided further evidence of a cooling labor market and gave policymakers more time before considering another rate increase.

Federal Reserve officials had already indicated that they were not in a hurry to raise rates. New York Fed President John Williams, a voting member of the Federal Open Market Committee this year, said after the September meeting that there was “no need for urgency.”

The CME Group’s FedWatch Tool put the probability of an October rate increase at about 24%, down from more than 75% a week earlier. The Fed’s September projections included one additional rate increase this year, while some officials have since called for patience.