Bonds In Distress

This week, markets adopted a negative mood as both stock and bond prices dropped. The continued strength of US macro data and the publication of the Federal Reserve meeting minutes ignited fears of further monetary policy tightening. Both the S&P 500 and Nasdaq 100 broke through their 50-day moving averages. However, the real pain was felt in the bond market. Long-term US Treasury yields rose slightly above their October 2022 highs, driven by the real component of the yield. The real US Treasury yield (i.e., after adjusting for expected inflation) rallied to a new cycle peak, significantly surpassing the October 2022 levels. Given that cryptocurrencies often correlate with long-term real yields, this seems to be a warning sign for digital assets.

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10-year Treasury nominal and real yield

Source: Bloomberg

Cryptocurrencies faced a downturn as both Bitcoin and Ethereum saw declines of about 10% since last Friday's close. Most altcoins experienced significant drops; XRP and Litecoin each lost more than 20%. Despite a recent halving, Litecoin is now in the negative for the year.

The implied volatility for both Bitcoin and Ethereum surged due to the 10% spot move but remains historically low. Ethereum's implied volatility consistently stayed below Bitcoin's, as indicated by the DVOL indexes, with the current ratio just under 1. Calls have continued to dominate Ethereum options trading on Deribit. Given the subdued implied volatility and unfavorable macro factors, such as rising real rates, we wonder whether this offers an opportune moment for crypto investors to hedge.

Bitcoin DVOL index

Source: Deribit

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