Join the most important conversation in crypto and web3! Secure your seat today
Risky assets like bitcoin (BTC) and the tech-heavy Nasdaq index unexpectedly put in a positive performance on Tuesday even as U.S. consumer price index (CPI) data revived hawkish Federal Reserve concerns and sent Treasury yields higher.
A rise in bond yields makes borrowing more expensive and typically has traders ditching risky assets in favor of fixed-income securities, as observed in 2022. Yet, while the 10-year U.S. Treasury yield jumped more than 12 basis points to the highest in over a month, bitcoin added nearly 2% on Tuesday, topping $22,000, and Nasdaq ended the day 0.7% higher.
U.S. CPI data showed January inflation slowed slightly from the previous month, but the cooling trend moderated. The data also lifted the two-year yield to a two-month high of 4.64% and prompted traders to ramp up bets of a quarter-point (25 basis point) Fed rate increase in June while assuming similar moves in March and May.
The central bank raised rates by 25 basis points last month, having delivered a half-point rate increase in December and four 75 basis points hikes earlier in the 2022. The speedy tightening cycle roiled risk assets, including cryptocurrencies, last year.
"Risk assets are following implied volatility, which sold off heavily following the CPI release," QCP Capital's market insights team told CoinDesk. "[We] guess the thinking is as long as the Fed doesn't panic and go back to 50 basis points, we are in for a slow ride, which equities can stomach, especially if its a period of strong growth with high prices which will still benefit equities through higher earnings."
Implied volatility refers to the options market's forecast for price turbulence over a specific period and is often equated with uncertainty.
Data from Amberdata show bitcoin's seven-day implied volatility dropped sharply to an annualized 40% from 50% following the CPI release, paving the way for the cryptocurrency to track technology stocks higher.
Moreover, while inflation remains stubbornly high, the economy remains resilient, providing risk assets a reason to rally. Goldman Sachs CEO David Solomon on Tuesday said the prospect of a softer landing for U.S. economy has improved. Soft landing means a cyclical downturn in economic activity that stops just short of an outright recession, measured by consecutive quarterly contractions in growth rate.
According to Singapore-based QCP, bitcoin's resilience may be fleeting, especially if "it starts looking like the Fed will raise the median dot plot at the March meeting." In December, the median dot projected a year-end 2023 rate of 5.125%.