Volatility in $25 Trillion U.S. Treasury Market Slides. Here’s Why It Matters to Crypto

Reduced bond volatility stabilizes leveraged financing, allowing the rehypothecation of collateral to create money. In other words, it alleviates liquidity stress in the global market, incentivizing higher borrowing and gearing of portfolios. That is a positive outcome for risk assets like bitcoin and stocks. Higher bond market volatility does the opposite, forcing leveraged players to sell assets and reduce their exposure to risk. Peaks in the MOVE index tend to mark bottoms in stock market indexes.

Bitcoin has regained some poise during the MOVE index’s recent decline. The largest cryptocurrency by market value has risen by over 8% since hitting a low below $25,000 on Sept. 11, CoinDesk data show.

The latest decline in the index helps ease financial conditions, while major central banks appear in no mood to deliver rapid rate cuts any time soon.

Must admit this is a remarkably fall in #liquidity stress. Well done US policy markets? Bond vol is truly skidding. MOVE index lowest in 6 weeks! pic.twitter.com/lRjdV7HhMk

— CrossBorder Capital (@crossbordercap) September 1, 2023

The index, however, may surge if an unexpected shock forces the unwinding of leveraged short bets in Treasury futures.

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“The current build-up of leveraged short positions in U.S. Treasury futures is a financial vulnerability worth monitoring because of the margin spirals it could potentially trigger,” the Bank for International Settlements warned in its latest quarterly report. According to the BIS, about $600 billion worth of short positions are currently open in the Treasury market.

Edited by Sheldon Reback.

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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk’s Markets team.

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