Jerome Powell‘s words yesterday led to a rise in the interest rate on 10-year US Treasury bonds, while at the same time there was a drop in the price of Bitcoin.
Why these two responses? Well, let’s say right away that we are dealing with very different investment instruments.
What are 10-year Treasury bonds and how are they different from Bitcoin?
During a speech at the Wall Street Journal’s Job Summit, the governor of the US Federal Reserve did not rule out that there could still be a rise in inflation, but at the moment the Fed will not intervene. This triggered a drop in stock markets, tech stocks in particular, and even Bitcoin reversed.
Basically, Jerome Powell’s words may have pushed investors to turn to one of the most reliable investment systems on the market: Treasury Bonds. They are an instrument that allows investors to lend money to their state, which will return it to them in the time agreed with interest rates. For the investor, there are few things as secure as a loan to the state, while for the state the bonds serve to finance the debt.
How do 10-year Treasury Bonds work
10-year Treasury Bonds are US government bonds with a 10-year yield. Often mistakenly referred to as t-bonds, this definition is actually associated with 30-year government bonds, not 10-year bonds. The more appropriate term is actually t-notes (Treasury Notes). To the investor who subscribes to a government bond, the government periodically pays interest to him. In practice, Treasury Bonds constitute a constant source of income. At the end of the term (in this case, after 10 years), the government returns the borrowed sum.
However, government bonds, including Treasury Bonds, are not without risk. An increase in interest rates (as happened yesterday) leads to an increase in the cost of money and thus to a devaluation of the government bond. Similarly, inflation is also a risk for Treasury Bonds.
The differences with Bitcoin
Bitcoin has not been insensitive to Jerome Powell’s words, so much so that it has lost around 4% since yesterday, while remaining above $47,000. It is an indicator of how investors are concerned about the current situation which does not only affect the US, because what happens in the US is usually reflected in the world economy. In any case, Bitcoin’s performance remains decidedly solid, with a gain of over 50% since the start of the year.
As an investment product, the big difference compared to government bonds, may be the volatility. Bitcoin has accustomed its audience to losing and gaining frightening amounts in the course of a few hours. But the high demand from institutional, as well as retail, investors shows that it is increasingly becoming a product to be included in a diversified portfolio.