What’s Going on in the Bond Market and Why Does It Matter for Bitcoin?

The bond market is much more important than you might think. JP Morgan targets those who don’t think enough and the ECB thinks debt management is more important than inflation.

• A storm in the bond market
• Just, why would you?
• What does the ECB care about?

A storm in the bond market

“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” – James Carville, U.S. President Clinton’s campaign manager 1990

Bonds have always got a bad rap. They don’t have the personalities behind them like Tesla or Microsoft. They aren’t in the news for product launches or controversial comments. But they are more important to the individual on the street than any phone or car manufacturer.

In recent weeks, the sell-off in the bond market, a reaction to the inflation expectations we have been shouting about for some time, has unnerved central bankers and concerned the general public, not at all. The result of falling bond prices is a rise in bond yields. In simple terms, interest rate expectations go up. With higher interest rates comes higher borrowing costs. Higher for companies, higher for governments, and ultimately higher for individuals. 

Today, central bankers are brushing off the threat and repeating their intention to avoid inflation whilst at the same time declaring inflation expectations to be momentary. In terms of forecasts, the key official inflation expectation level to watch is 2023. If it begins to be adjusted upwards, ignore the platitudes and get ready for some serious market shifts.

There is a fear in the market, justified in our opinion, that because the inflation expected after the 2008 financial collapse didn’t materialize, central bankers who got it wrong then are going to get it wrong again, this time on the other side.

There is no doubt global economic growth is coming, the question is about sustainability. The Biden stimulus package in the US will have not just added cash to the economy but, in some ways, more importantly, confidence. With confidence comes growth. With this growth will come less of a reliance on the state to support struggling sectors and thus slow down the debt increases currently piling up on treasury balance sheets.

If Bond prices don’t go back up or aren’t forced back up through Central Bank actions, the cost of this debt could punish each and every one of us for years to come.

Just, why would you?

In an interesting and much-publicized event last week, JP Morgan announced their plans to issue some 1-year debt notes to be priced based on the stock value of a basket of cryptocurrency equity shares.

The basket will be made up primarily (68%) of exposure to MicroStrategy, Square, NVIDIA, and Riot Blockchain with a little bit of PayPal thrown in for good measure. So far so good.

We have commented in the past that the result of major financial institution’s involvement in cryptocurrencies would inevitably lead to investment packages with cool-sounding names and highly convoluted and impressive descriptions. 

We are not buying it.

The low management fee of 1.5% would suggest that JP Morgan has two aims.

JP Morgan will decide the value of the note on maturity, and so they can increase their profits above the 1.5% by simply marking down the buy back price. By investing in companies rather than underlying cryptocurrencies, they are increasing the risk rather than reducing it. One good accounting scandal in any one of those companies could reduce any return, even if bitcoin doubled in value. The only limit to your losses is, of course, zero priced notes.

The second aim, and more likely the main one, is to drum up a list of investors who want exposure to cryptocurrency but, at the same time, feel using a middleman will reduce their risk and increase their profits. They have set the minimum investment at $1,000. This feels like a marketing ploy.

The irony here is that buyers would have a more sound investment strategy if they just bought their own cryptocurrencies directly. The whole aim of blockchain is to reduce the interference of a middleman. If you think prices will rise, why get someone else to buy them for you?

What does the ECB care about?

In a week that saw European equity markets hit a fresh high, all eyes were on the ECB meeting and their response to activity in the bond markets. The passing of the Biden $1.9 trillion stimulus package was of course important, but the markets have already priced this in some weeks ago and last week was all about politics. 

Ruchir Sharma, chief global strategist of Morgan Stanley IM was doing the rounds last week across the media spectrum warning of recession risk. His argument was essentially that the markets have already priced in huge growth and world economies recovering quickly. The only way now is down. 

So the ECB, in its meeting last Thursday, had to contend with inflation fears, recession fears and growth fears. Normal day at the office then.

The cheapening Euro was welcomed, but there are few betting that current USD strength will be a permanent feature of this year. The main question was what the ECB would do in response to the recent bond market activity. It had been feared, fuelled by leaked comments and public disputes between members of the commission, that they would do nothing. Instead, President Lagarde confirmed that they would step up the pace of their bond-buying program “significantly”.

The fact is that the EU progress in returning to a new normal has been nowhere near the levels of success found in the US & UK. There are myriad reasons for this but for now, the argument within the commission is over. They don’t care about inflation. They care about the members’ borrowing costs.

The news next week

Everything is on a pinnacle. Stock markets, bond prices, and Disneyland, Florida is sold out. A lot to play for this week.

Tuesday – German ZEW confidence numbers and US retail sales can’t be missed.

Wednesday – The day will be dominated by FOMC announcements out of the US but don’t forget to check out Eurozone CPI data.

Thursday – For fun, check out Australian retail sales. They are way ahead of everyone else in terms of freedom to move (and shop).

The author works exclusively for Xcoins.com and has spent almost 20 years in trading rooms from New York and London to Düsseldorf and Sydney. To stay up to date on all things crypto, like Xcoins on Facebook, follow us on Twitter and LinkedIn and enter your email address at the bottom of the page to subscribe.