Markets are turning away from bonds and into assets like Bitcoin (BTC) as “safe haven” stores of value as global war conflicts heat up, an Allianz Economist told CNBC in an interview last week.
The analyst for the $2 trillion financial services firm explained why the Treasury market has been so volatile this month, and why he believes a recession awaits the United States in early 2024.
Explaining The Treasury Selloff
According to Allianz chief economic advisor Mohamed El-Erian, the treasury market has already lost its economic, policy, and technical “anchors” – benchmark price figures toward which the market may form biases.
Furthermore, the economist expects the market supply of treasuries to continue rising as the government issues more debt, and as the Federal Reserve remains a net seller of such debt.
“The question mark is: who is gonna buy?” said El-Elrian on Thursday. “That question of buyers isn’t gonna go away any time soon. Buyers are hesitant, and they should be hesitant, in view of what’s happening to the supply of government debt.”
The Federal Reserve has been steadily shrinking its balance sheet since last year to take money out of the economy and help combat soaring inflation. Since inflation is yet to reach the Fed’s 2% target, more sales are expected, thus pushing bond yields higher.
Meanwhile, the U.S. government was forced to abandon its debt ceiling in June, with total government debt now over $33 trillion. In August, Fitch Ratings downgraded the government’s debt to AA+ citing its persistent deficits, political standoffs, “weaker government revenues, new spending initiatives, and a higher interest burden.”
El-Elrian noted that high-interest rates are bad for both businesses and the government and create an increased risk of recession in 2024, alongside a widespread decline in savings.
Why Bitcoin Instead?
When asked whether investors and governments would move back into bonds as a “safe haven” as geopolitical conflict begins to dominate, El-Elrian said that the numbers don’t bear this out. In fact, yields for 10-year U.S. treasuries have risen since the conflict between Israel and Hamas kicked off earlier this month.
“We haven’t seen the flight to quality and flight to safety you would expect given what’s happening in the world,” said the economist.
“You have people talking about Bitcoins, about equity being the ‘safe asset’ because they’ve lost confidence in government bonds being the safe asset,” he continued. “It’s because of the nature of this interest rate risk.”
Bitcoin skyrocketed to a yearly high of $35,000 last week, netting substantial gains alongside gold. While some believed the rall was in response to excitement about an upcoming spot Bitcoin ETF, BitMEX co-founder Arthur Hayes theorized that investors were fleeing to Bitcoin and gold as markets lost faith in the quality of government bonds.
“If they are rallying while US Treasury yields spike, that tells me that both safe haven assets are discounting a future of more government spending and more inflation,” wrote Hayes at the time.
Earlier this month, BlackRock CEO Larry Fink called Bitcoin’s rally a “flight to quality.”
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