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Will 1% Yield Force The Fed Into Curve Control?

As the 10-year Treasury yield climbs, Wall Street’s 2021 outlooks provide clues for just how much of a selloff the central bank will tolerate. Will 1% Yield Force The Fed Into Curve Control?

There’s nothing that whips Wall Street into a frenzy quite like a sharp move higher in U.S. Treasury yields.

For instance, consider this Bloomberg News headline from last Wednesday, when the benchmark 10-year yield touched 0.96%: “Treasury Yield Spike Risks Sparking Domino Effect in Markets.” Investors saw the possibility that stocks would be “vulnerable to a reasonably significant correction,” that the price of gold could stumble and that the dollar might weaken from an already two-and-a-half year low.

All this, even though current long-term U.S. yield levels would have been unprecedented just 10 months ago and barely register as a blip on a chart of recent history.

So far, there’s little sign of a ripple effect like the ones in previous years. On Friday, the 10-year yield jumped to as high as 0.9842%, closer to 1% than any time since March, after a middling November jobs report. Stocks nevertheless advanced to record highs.

The sanguine reaction is in no small part because traders expect the Federal Reserve to quickly clamp down on any large and sustained increase in long-dated Treasury yields, which influence everything from mortgages to auto loans to borrowing costs for heavily indebted corporations.

Some strategists suggest the central bank will announce such a move to tame the bond market on Dec. 16 by extending the weighted average maturity of the $80 billion in Treasuries it purchases each month. That’s not quite yield-curve control in its purest form, but it effectively sends the same message: We won’t tolerate a selloff of this magnitude.

Is a 10-year Treasury yield of about 1% enough to spook the Fed into action? The answer may depend on which bank’s forecast for 2021 you trust.

I wrote last month about Goldman Sachs Group Inc.’s prediction for next year, which is for a modest increase in 10-year yields to 1.3%. JPMorgan Chase & Co. expects the same. Barclays Plc forecasts the 10-year yield to rise to just 1.25% by the end of 2021, while BMO Capital Markets expects it to hit that mark “at some point” next year, but investors will view it as “an enticing opportunity” to buy.

Morgan Stanley sees 1.45% at the end of 2021. Bank of America Corp. says 1.5% for the 10-year note, while the long bond will reach 2.4%, leaving the curve from five to 30 years at the steepest since early 2014.

This would seem to suggest that Treasury yields still have room to run before the Fed would intervene, particularly given that interest rates are increasing because of the prospect of fiscal aid in the short term and a potentially supercharged economy next year.

Most bank strategists are forecasting a slow and gradual build to those end-of-2021 levels. In that sense, the world’s biggest bond market is right on track without the central bank doing anything differently.

Meanwhile, the median forecast among 53 analysts surveyed by Bloomberg is for the 10-year yield to end 2021 at 1.15%. TD Securities is among those who expect yields will be lower a year from now, calling for 0.9% for the 10-year note and 1.65% for the 30-year bond.

“If monetary policy is now shifting to a role more akin to [yield-curve control], this limits the rise in yields but is not looking to depress them further,” TD strategists wrote in a Dec. 2 report.

The bank’s strategists expect the Fed to announce it’s extending the maturity of its bond purchases in December to achieve this balance:

Central banks have tried to support growth and inflation by taking duration, and thus term premium, out of the market.

The evidence overwhelmingly suggests that QE compresses term premium, precisely one of the mechanisms targeted by central banks to influence the economy. In this context, the long road to recovery from the COVID-induced economic carnage will likely keep asset purchases a key feature of stimulus efforts, especially in the coming months.

But … there is an inherent drift in the current policy to see QE purchase less of the net issuance — especially in the US. Our expectation is that the Fed will extend the weighted-average-maturity of Treasury purchases, which would help to prevent a large rise in the term premium, though not push it lower, as other factors work through.

Still, in a BMO survey asking whether the Fed will extend its weighted-average maturity in December, 56% of respondents said no, while 44% anticipate the change will be formalized.

This is a rather unusual rift for a policy move that could have lasting implications for the level of long-term yields and the shape of the curve. In congressional testimony last week, Fed Chair Jerome Powell noted that the central bank was in no hurry to taper its bond buying but also gave no signal that it was ready to necessarily do more, either.

He and other officials have made the point that purchasing $120 billion a month of Treasuries and mortgage-backed securities is already a huge sum based on precedent. They won’t have much of a chance to provide more clarity — policy makers are now in their self-imposed quiet period before their decision next week.

One potential wild card: Quantitative strategists at Nomura Holdings warned last week that systematic players known as commodity trading advisors might ditch all of their long positions in Treasuries if the 10-year yield reaches 1.02%. If that happened, the benchmark could quickly jump to 1.2%. The 10-year note hasn’t sold off that much over a calendar week since June.

Jeffrey Rosenberg, senior portfolio manager at BlackRock Inc., said Friday on Bloomberg TV: “93 basis points, 100 basis points, 125 basis points, it’s really about the pace of increase that the Fed will concern itself with. So if you’re talking about in the next six months, a gradual increase in interest rates, I don’t think the Fed needs to react to that.

What the Fed would be reacting to would be a very sharp rise in interest rates. Certainly we saw that during the taper tantrum — they react to big moves because that’s disruptive to financial market conditions, to financial market functioning.”

Quant freakout notwithstanding, it’s hard to make a ironclad case for the Fed to rush to extend the average maturity of its bond purchases next week. Across Wall Street, bond traders have been conditioned to expect the central bank to keep short-term rates near zero for the next few years at a minimum and, at least in 2021, not to test the long end too much.

At their November meeting, officials discussed updating their forward guidance on the pace of bond buying fairly soon. That seems like the kind of low-hanging fruit that Powell can build consensus around while advocating for additional fiscal aid to anyone who will listen on Capitol Hill.

If 10-year yields glide upward and exceed 1% as a result of such long-awaited fiscal stimulus, it seems like a tradeoff the central bank would be more than happy to make. The Fed’s threat of yield-curve control is enough to keep the world’s biggest bond market in check.

Updated: 5-26-2021

The Fed Is Suffering From Tantrum Paranoia

The dangers of losing the market’s confidence on inflation are worse than those from cutting back the flow of quantitative easing.

The U.S. Federal Reserve risks waiting too long before trimming back its stimulus out of fear of a repeat of the 2013 taper tantrum, but this time really is different as it needs to prove its inflation-fighting chops.

The dangers of leaving it too late and losing the market’s confidence are worse than those from cutting back the flow of quantitative easing. With a balance sheet of more than $7 trillion the risks of overdoing the tapering are relatively small.

A difference of opinion between the Fed’s view of what it sees as transitory price gains and the market’s assessment of the pricing of forward inflation expectations led to a sharp bond selloff in February. The Fed risks a repeat if it doesn’t appear credible on inflation. If its more benign view is proved right — and inflation returns to close to the 2% Fed target next year — it can always modify its course.

The Fed isn’t alone in this dilemma but it’s the only one suffering institutional paranoia because of the 2013 taper tantrum. It needs to get over this: The levels of stimulus and the upswing in inflation were much lower then. The Bank of Canada has started tapering without any discernable impact on yields and the Bank of England will almost certainly end its QE program at the end of 2021.

The grumblings from hawks on the European Central Bank’s governing council are getting louder but it’s in no shape to front run the Fed. Inflation is a collective global problem but where the U.S. goes the rest largely follow.

That’s why it’s important to recognize any subtle shifts in the Fed’s view of whether the economic rebound will lead to an embedded shift in the inflationary environment. Vice Chair Richard Clarida noted last week that, “If we were to see upward pressure on prices or inflation that threatened to put inflation expectations higher, I’ve no doubt that we’d use our tools to address that situation.”

Even Lael Brainard, a dovish member of the Federal Open Mark Committee, qualified her belief that long-term inflation expectations are well-anchored with the proviso that “we have the tools and the experience to gently guide inflation back to target” and that “no one should doubt our commitment to do so.”

The Fed is still sticking by its central belief that most of the sharp inflation gains will fade next year. As a result, market fears of runaway inflation are subsiding even though central bank stimulus shows little sign of wavering.

But the prospect of inflation hasn’t suddenly vanished. For the Fed to still be pumping in monthly stimulus of $120 billion creates big inflationary pressures, especially when set alongside U.S. growth this year that’s forecast to exceed 6%.

Consumer prices rose at an annual pace of 4.2% in April, with the more forward-looking producer price measure rising 6.2%. The release of the May CPI data on June 10 will be a major test of market confidence in the Fed’s reassurances.

James Gorman, Morgan Stanley’s boss, believes the Fed will start tapering at the end of this year and begin raising rates in early 2022. That might be too fast for the FOMC’s current thinking but if inflation remains significantly above the 2% official target it may be hard to resist, especially if Joe Biden’s administration continues with its multi-trillion dollar fiscal splurge.

Bond yields are probably heading higher over time, which is logical with the global economy recapturing lost ground from last year. The question is whether this will be an orderly process, with the Fed more in lockstep with the evident inflationary risks.

Financial markets need to believe central bank modelling isn’t divorced from the reality of supply bottlenecks, commodity price surges and a boom in retail sales. Time for central banks to start planning the orderly wind down of record stimulus. It’ll be safer in the long run.

Updated: 5-26-2021

Currency Volatility Set For A Comeback On Looming Policy Shifts

After more than a year of slumber, investors are preparing for currency volatility to come roaring back to life.

From Nomura International Plc to Rabobank, banks are recommending cheap protection against foreign-exchange price swings, which have been muffled so far by a barrage of liquidity and record-low interest rates.

The premise is that as growth picks up and central banks start telegraphing an end to all the stimulus unleashed during the pandemic, traders caught off guard may have to recalibrate their positions, setting the stage for sudden jolts.

Investors are “ready and willing to pull the trigger,” said Neil Jones, head of foreign-exchange sales to financial institutions at Mizuho Bank Ltd., who is recommending traders buy currency hedges as long as one year out.

Last week, JPMorgan Chase & Co’s gauge of foreign-exchange fluctuations fell to the lowest level since March 2020. While there have been many false dawns over a rebound, the latest calls point to a significant shift in the market’s disposition.

Unlike the long-end of bond curves which suffered steep losses as inflation started accelerating and economies opened up, currencies are sensitive to changes in short-term rates that still remain firmly anchored by central banks.

And it’s why traders are now scouring for any clues that policy makers might tip the balance. On Tuesday, New Zealand’s dollar jumped to a three-month high after the central bank predicted interest rates will start to rise next year and was overall more hawkish than expected.

Taper Surprise

“The market is not prepared for severe taper surprises from central banks right now,” Jones said, a reference to any unexpected reduction in their bond purchases. “The next 12 months suggest a plethora of mine fields.”

Among potential triggers are the European Central Bank’s meetings in June and July and the Federal Reserve’s Jackson Hole symposium in August. Julian Weiss, head of currency options at Nomura is snapping up one- to three-month volatility in the euro-dollar pair, contracts that capture all three events.

“Volatility is too cheap,” he said. “We’re seeing more countries easing lockdowns and we believe the bounce in global growth is yet to be fully priced by the currency markets and the dollar in particular.”

Three-month implied volatility in the euro-dollar cross currently trades around 5.85%, below its year-to-date average. The relative premium on the tenors, as shown by the spread between implied and realized volatility stands near parity, which suggests the options aren’t overpriced.

Hedge funds have also been adding long volatility positions in the euro lately, expiring around the ECB policy meetings to be held in June and July, according to two Europe-based traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.

Meanwhile, Jane Foley, the head of foreign-exchange strategy at Rabobank, say now may be a good time to buy three-month volatility in the dollar-yen or dollar-swiss franc crosses, haven currencies that have lagged all their Group-of-10 peers over the past six month thanks to the market’s risk-on mood.

“Plentiful liquidity is like a drug for markets and can make price action far less sensitive,” she said.

Some, such as Toronto-Dominion Bank’s Ned Rumpeltin, remain cautious, saying the summer is likely to be quiet.

“I’m not sure if buying six-month volatility on a ‘fire-and-forget’ basis is a foolproof idea,” said Rumpeltin, the firm’s European head of foreign-exchange strategy. “You’re probably better off buying three-month volatility in three months time.”

It wouldn’t be the first time that traders missed the mark. When talk of Fed tapering swept through markets in the beginning of the year, there was a short-lived rebound in volatility that faded once policy makers played down the prospect.

Still, few doubt that the market is in for a shake-up. “It won’t take too much to get investors a little bit worried and scared about how the picture will change,” said Nomura’s Weiss.

There’s a Big Debate Brewing Over A Key Component of the U.S. Bond Market

Now that the term premium’s in positive territory there’s more and more talk about how far it might go.

Will 1% Yield Force The Fed Into Curve Control?

Whisper it softly, but this year has witnessed a sea change in markets.

The term premium — or the extra compensation bond traders ask for in return for holding longer-term debt — has turned positive after spending the better part of the last five years moving to or below zero. Another way of putting it, as my colleague Liz McCormick did earlier this year, is that bond investors want to get paid like they used to when lending money to the U.S. government. And while such a request might sound innocuous enough, it has the potential to remove a key support that has helped underpin demand for riskier assets in recent years.

Of course, there’s never much agreement when it comes to the term premium, from what it might mean for the rest of the market to where it ‘should’ be. In many ways, it’s the Rorschach test of the financial world. You can see anything you like in it, and use it to justify (or dismiss) almost anything that’s happening. For instance, when the yield curve inverted back in 2019 in a traditional harbinger of economic recession, people blamed it on low term premia.

Now talk is heating up as concerns over inflation and discussions of future tapering by central banks have combined to spark that bounce in U.S. Treasury yields. Citigroup strategist Matt King kicked off the conversation back in March, arguing that this year’s jump in yields was more about changes in term premia than investors expecting higher interest rates from the Federal Reserve as the U.S. economy recovered from a historic pandemic.

It makes some sense that term premia would rise given that so much of market uncertainty is concentrated at the long-end of U.S. government debt. The Federal Reserve has repeatedly pledged to look through a ‘transitory’ pick-up in inflation and keep rates low, at least in the near-term.

And with the U.S. having crossed the Rubicon of fiscal stimulus, there’s plenty of uncertainty about the longer-term impact of a wave of additional debt. As King put it: “One might almost speculate more strongly still: until the bond vigilantes reawaken, politicians have every incentive to continue handing out free money to their citizens. What could be more natural, then, than the return of a few basis points of risk premium?”

Over at Barclays, analysts led by Anshul Pradhan have echoed the sentiment, arguing that the metric remains far too low given the amount of uncertainty now faced by investors. “What that means for markets is that even if the modal expected policy outlook is unchanged, investors should demand a higher than usual term premium for taking duration risk at least until the dust clears and uncertainty subsides,” they wrote this month.

TD Ameritrade analysts led by Priya Misra echoed the sentiment this week, noting that an unwind of central banks’ bond-buying programs will leave government bonds more vulnerable as more of them will need to be snapped up by private investors.

She estimates that almost 53% of the net issuance of U.S. sovereign bonds in 2020 was purchased by sovereign banks, with that figure expected to drop to 48% and 44% in 2021 and 2022, respectively. “The pickup in duration supply over time is one of the reasons for our forecast for higher term premiums and higher yields later this year,” she notes.

And then there are those who argue that there may be more unexpected demand for U.S. debt waiting in the wings — perhaps even enough to compress the term premium rather then send it shooting up. Zoltan Pozsar, Credit Suisse’s money market guru and a frequent Odd Lots guest, suggests tapering in the U.S. could be timed with another big event: Just as the Fed retreats from the market, another very large buyer could step in.

As Pozsar Put It In Research Published On Tuesday:

“…and rates don’t have to sell off, provided there is coordination at the Fed. The monetary and regulatory arms of the Fed typically do not coordinate, but never say never. Using the Wells Fargo ‘option’ could help the Fed make taper a smoother affair than the 2013 experience, which wasn’t smooth to begin with.

It’s one thing to taper against a boring fiscal backdrop like during 2013, and another to taper against a backdrop painted with cumulonimbi of fiscal issuance – given the fiscal outlook, the Fed should be creative with the Wells Fargo option.

Then there is the consensus problem, which is that everyone expects rates to go up from here, and “if everyone is thinking alike, then somebody isn’t thinking”: the macro reasons for higher rates make sense, but the potential for more Treasury purchases either by the Fed or banks before taper commences, and Wells Fargo deploying $500 billion of balance sheet after taper commences, could set off a rates rally from here. Consider these problems at least as risks…”

So consider the humble term premium. I certainly will be!

Updated: 6-17-2021

Why The Fed Might Bring Back ‘Operation Twist’ (VS Yield Curve Control) In 2021

As the FOMC meets this week on March 16–17, one possible economic policy tweak is the return of “Operation Twist.” In general, this move is meant to stimulate the U.S. economy. The U.S. Federal Reserve (Fed) implemented Operation Twist in 1961 and again in 2011 and 2012.

Operation Twist is a form of quantitative easing that the Fed uses. Quantitative easing happens when a central bank buys long-term securities to help encourage lending and investment and increase cash flow in the market.

CNBC reported that Mark Cabana, a Bank of America Global Research rates strategist, told his clients that the Twist, or buying long-term bonds while also selling shorter-term Treasuries, was “the perfect policy prescription for the Fed, in our view.”

The mainstream media gave the policy tweak the name “Operation Twist” as a way of referencing how a new monetary policy impacts the shape of the yield curve. Analysts have been speculating about whether the Fed will use this policy strategy again to help smooth out volatility in the market.

How Operation Twist works

In 1961, the Fed used Operation Twist and sold short-term government debt in the open market. The Fed used the proceeds to buy long-term government debt. The move didn’t cause enough of a shift to lower the long-term rates, but it did boost the economy by raising short-term rates.

The most recent usage of Operation Twist was in 2011 and 2012, following the housing crisis of 2008. In 2011, the federal short-term interest rates were already at zero and so they couldn’t be lowered. In order to lower long-term interest rates, the Fed sold short-term Treasury securities and bought more long-term securities.

This second Operation Twist so far, with a cost of $400 billion, started in September 2011 and concluded in December 2012.

Operation Twist’s Goal

“The objective is to nudge up shorter-term rates and drive down those at the longer end, thus flattening the yield curve,” CNBC reported earlier in March. Operation Twist intends to strengthen the U.S. dollar and stimulate cash flowing into the economy.

Bill Gross Hints At Fed Operation Twist In 2021

Former Pimco Chief Executive Bill Gross has hinted at the possible return of Operation Twist in 2021. In an interview, Gross said he had “a hunch” that something like Operation Twist could be coming soon. The Fed would start spending more on 10-year, 20-year, and 30-year Treasury bonds to keep long interest rates down.

Gross also speculated that the Fed might have already initiated an Operation Twist in recent weeks after bond yields increased.

Updated: 8-16-2021

Something Is Awry In The Treasury Market This Summer

Bond yields fell too far, then came back too strong; a real yield of minus 1.2% is hard to understand.

I get uncomfortable when I can’t understand what’s going on in the markets, and I’m not really happy with my explanation for the weirdness of the Treasury market over the past few months. Given that pretty much everything else rests on Treasurys behaving sensibly, my level of discomfort is high.

The core of the problem is that as inflation soared, bond yields fell, creating an instant contradiction: Inflation is poison to bond investors, so they would normally be expected to sell. I have an explanation, but it isn’t perfect.

My take: Investors came to the realization that the huge post-pandemic debt burden will keep rates lower than in the past, while they kept faith that inflation will be manageable. There is little to indicate investors fear a recession-inducing mistake by the Federal Reserve, and they aren’t expecting runaway inflation either.

The market response from March to the start of this month can be thought of as pricing in a repeat of the secular stagnation brought on by the 2008 financial crisis, with the twist of slightly higher inflation than in the past decade.

Pramod Atluri, a fixed-income portfolio manager at Capital Group, says this is akin to “too much debt and too much money in the system.”

That means low bond yields, as debt holds back the economy and the Fed is unable to raise rates much. It means corporate bonds do fine, because there is so much money chasing safe returns that even fairly risky companies can refinance. And it is great for stocks, as the past decade shows, especially those able to offer reliable growth in a weak economy—broadly, Big Tech.

Yet, Treasury yields still seem to have fallen much too far from March to July, before an inexplicably large bounce.

“It is a conundrum,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs. “The scale [of the moves in yields] seems at odds with the degree of concerns.”

This month the market’s again started anticipating economic expansion, with a rise in Treasury yields, stable junk-bond spreads and a swing back from Big Tech and other growth stocks to economically sensitive cyclicals, especially banks and industrials.

Once again, though, the size of moves still seems extreme. Mr. Atluri says it is possible that with so much money sloshing around, the levels of markets carry less information than their direction; so Treasury yields rise or fall on good and bad news as normal, but sometimes go much further than they would have in the past.

Markets also have been struggling to come to grips with the spread of the Delta variant of Covid-19. The variant’s spread in the U.K. coincided with the fall in bond yields, while the switch to rising yields coincided with an improvement in the U.K.’s hospital admissions, as quantitative strategist Andrew Lapthorne at Société Générale points out.

Again, though, it is deeply strange that stocks should reach new highs both when bond yields were falling (and stocks were driven by Big Tech) and when bond yields were rising (and stocks were led by cyclicals).

And there is one more oddity that is far harder to understand: By Aug. 3, yields on 10-year Treasury inflation-protected securities, or TIPS, reached minus 1.2%, the lowest point for inflation-adjusted yields in history. It could only make sense if investors were expecting stagflation, or weak economic growth combined with higher inflation.

But if the risk of stagflation were rising, investors should be buying gold—which usually rises when TIPS yields fall—and dumping the junkiest corporate bonds, as defaults would be sure to rise. Instead, the relationship between gold and TIPS broke down, while junk bond yields rose only a little from what had been close to record low spreads over Treasurys.

We can square the circle by dismissing the signal from TIPS. It is never satisfactory to think the market just wasn’t working, but TIPS yields seem to have fallen dramatically more than they should, which I can just about believe for a market that is anyway fairly illiquid when traders have decamped to the beach.

It is even easier to believe given the rebound of the past two weeks, which has brought yields back up to a more reasonable level, albeit still deeply negative, on the back of some signs of economic strength.

Perhaps July was just a summer anomaly. But with the wild excesses of meme stocks, clean energy, electric cars and SPACs still fresh in the memory, I’m not confident that the return of normal market relationships will last.

Updated: 12-15-2021

Powell Says Foreign Buyers Distorting Yield-Curve Readings

* Fed Chair Underscores Role Of Low Japanese And German Rates
* Powell Commented After U.S. Central Bank’s Last 2022 Meeting

Federal Reserve boss Jerome Powell appears unperturbed by the fact that longer-term bond yields remain low even as officials lay the ground work for tighter policy and inflation is ticking higher.

While the drop in longer-term rates may be viewed by some as indicative of where so-called terminal rates for U.S. policy might ultimately lie, Powell on Wednesday emphasized the impact of ultra-low yields in places like Japan and Germany in helping to keep them anchored.

“A lot of things go into the long rates and the place I would start is just look at global sovereign yields around the world,” Powell said at a news conference following the Fed’s final scheduled policy meeting for the year, which saw officials ramp up the pace of stimulus withdrawal and boost predictions for rate hikes in 2022. The Fed Chair noted that rates on Japanese and German government bonds are “so much lower” than those on Treasuries and that with currency hedging taken into account American debt provides investors with a higher yield. “I’m not troubled by where the long bond is,” he said.

This stands as something of a contrast to the view expressed back in 2005 by one of Powell’s predecessors. Back then, Fed chief Alan Greenspan described a decline in long-term bond yields even in the face of six policy rate increases as a “conundrum.”

Japanese investors piled into U.S. bonds in October at the fastest pace since just before the pandemic struck, Treasury data show. Net purchases from investors in the Asian nation increased to $9.93 billion, from $7.81 billion in September. While 10-year yields rose to a five-month high of 1.70% in October that are now down about 25 basis points from that peak.

According to Powell, the move in longer-end rates may provide “some assessment” about the course of Fed rates over the cycle and officials have their own estimates, but those types of predictions are very speculative. “Those are highly uncertain,” he said. “We’ll make policy based on what we’re seeing in the economy rather than based on what a model might say the neutral rate is.”

The yield on the U.S. 30-year bond has fallen to around 1.86% from a peak this year of 2.51% in March. The fall in long-end yields has come as shorter term rates have climbed sharply, causing the yield curve to flatten. And that has some investors worried.

There are warnings from some that the flattening of the curve and slide in long-term yields means that growth is at risk and that the Fed will need to end its upcoming tightening cycle sooner rather than later. And indeed that is evident in short-end market pricing too, which suggests rate hikes will peter out long before the forecasts of Fed officials indicate.

For now, though, Powell is preaching a message of calm and keeping firmly focused on economic outcomes. “We’re really focused on broader financial conditions” he said Wednesday.’ “We’re focused on maximum employment and price stability.”

Updated: 5-27-2022

Ex-BitMEX CEO Explains How Bitcoin Will Have Hit $1 Million By 2030

The European Union “is finished,” Arthur Hayes says, while yield curve control will put the U.S. in a “doom loop.”

Bitcoin (BTC) will cost $1 million by 2030, one of the industry’s best-known pundits insists, as countries worldwide shun the euro and United States dollar.

In his latest blog post published o April 27, Arthur Hayes, former CEO of crypto derivatives giant BitMEX, doubled down on his sky-high price prediction for Bitcoin and gold.

Bitcoin, Gold, Commodities… Just Not Fiat

In light of sanctions on Russia over its invasion of Ukraine, a giant pivot in both geopolitical and economic policy is coming, Hayes said.

As the U.S. and European Union battle to reduce dependency on Russian energy and food, the long-term repercussions are all but certain to hurt them — and send Bitcoin to the moon.

The situation is complex. Inflation, already at 40-year highs before the Ukraine conflict, is being exacerbated by Western sanctions, while Russia is reeling from the West freezing hundred of billions of dollars worth of its offshore assets.

China, meanwhile, is eyeing the situation with a view to protecting itself from a copycat move targeting its assets.

Since the end of the 1990s, a virtuous circle has seen China sell cheap goods to the West in return for its fiat currency, which is then sent back to importers in return for government debt. This keeps interest rates low, and China’s goods become even cheaper as a result.

Disruption to supply chains, inflation and now the risk of asset confiscation is now changing the status quo. Rather than switch its production model, however, Hayes believes that China will need to find a way to reduce its exposure to worst-case scenarios.

“It is impossible for China to sell trillions of USD and EUR worth of assets without destroying the global financial system. That hurts both the West and China equally and bigly,” he wrote.

“Therefore, the path of least destruction for those assets is to cease reinvesting maturing bonds back into the Western financial system. To the extent that China or its proxy State-Owned Banks can lighten up on Western equities and real estate without impacting the market, they will do so.”

Hayes identified “storable commodities, gold and Bitcoin” as the potential exit outlets for Beijing. While such a situation would be at extremes of the spectrum, there should nonetheless be a non-zero chance of China reversing its stance on issues such as Bitcoin mining.

“Doom Loop” Will Spark $1-Million Bitcoin, $20,000 Gold

More striking, however, is the post’s outlook for the future of the Western democracies, and in particular, the European Union.

Unable to be self-sustaining, Hayes argues, shutting out Russia will fuel an unstoppable fire that will result in the disintegration of the European project.

Exporters such as Germany will be unable to compete with China, while rampant inflation will create internal anger within the EU between the north and south.

“The ECB is trapped, the EU is finished, and within the decade we will be trading Lira, Drachmas, and Deutschmarks once more,” his prediction reads.

“As the union disintegrates, money shall be printed in glorious quantities in a pantheon of different local currencies. Hyperinflation is not off the table. And again, as European savers smell what the rock is cookin’, they will flee into hard assets like gold and Bitcoin. The breakup of the EU = $1 million Bitcoin.”

$1 million per single Bitcoin will also come as a result of the “doom loop” in Western financial policy, notably yield curve control (YCC), as a tool to prevent bankruptcy.

Gold — still the darling of the store-of-value narrative — will have seen up to $20,000 per ounce by the end of the decade.

Concluding, Hayes issued a call to arms to Bitcoiners, warning that the Bitcoin network needs participation in order to endure.

“The Doom Loop will usher in $1 million Bitcoin and $10,000 — $20,000 gold by the end of the decade. We must agitate for self-interested flags to save part of their current account surplus in Bitcoin so that Bitcoin farm-to-table economies sprout around the globe. Again, unlike gold, Bitcoin must move — otherwise the network will collapse,” the blog post concludes.

“Bear no malice towards those recalcitrant flags that refuse to learn even after hearing the good word. As Lord Satoshi said, ‘Forgive them, for they do not know what they do.’”

As Cointelegraph reported, Hayes is no stranger to sky-high price predictions, eyeing a BTC price “in the millions” in his previous post in March.

Reacting, macro analyst Alex Krüger nonetheless called for a rethink of some of his points.

“He will leave many a reader scarred with the mentality of a goldbug who believes the world is forever doomed,“ he tweeted, saying that Hayes “fabricates facts and exaggerates things to make his fat tail narratives come across as highly certain.”

“The Fed going dovish again starts a new bull run. YCC is one way that could happen,” he acknowledged in comments.



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