Bitcoin Benefits from Softer Fed Expectations, Rising Long-Term Yields

Bitcoin consolidated this week as market expectations for another near-term rate hike sharply reduced. New York Fed President John Williams argued that the September 25bp hike had reduced the urgency for further tightening, giving the Fed time to assess incoming data. The implied probability of an October hike fell from roughly 75% to around 50%, and subsequent data pushed it lower still, to roughly 37%.

The data that caused the Fed to rethink its rate hike plans included August's JOLTS openings, which fell to 7.079M, below expectations and the lowest in five months. September's consumer confidence dropped to 81.9 from 88.6, its weakest reading since 2014. Core PCE came in below expectations at 0.2% month-on-month and 3.0% year-on-year, reinforcing the case for patience.

However, the other side of the ledger is more resilient. Second-quarter GDP was revised to 2.2% annualised, consumer spending rose 0.9% in August, and initial jobless claims have fallen to their lowest since July. The Fed is weighing softer forward-looking employment and sentiment indicators against relatively resilient underlying activity.

For bitcoin, lower expected policy rates reduce the relative attractiveness of cash and short-duration Treasuries, which typically improves the backdrop for liquidity-sensitive assets. The unusual feature of this week is that long-dated yields moved the other way. The 10-year Treasury briefly reached around 5.3%, its highest level since 2002.

The divergence in the curve matters for portfolio construction. Investors are increasingly distinguishing between Fed policy at the front end of the curve and concerns around fiscal sustainability, heavy Treasury issuance and term premium at the long end. Bitcoin sits at the intersection: a softer expected Fed path supports it through the conventional liquidity channel, while a rising long end reflects concern about US fiscal sustainability rather than tighter monetary policy alone.

Flows show investors turning selective. Positioning has not followed the macro improvement. Inflows into digital asset investment products total only around $150M so far this week, down from approximately $3.5B last week. That reads as a slowdown in conviction rather than a reversal in sentiment, and it suggests investors are becoming more selective after such a strong period of inflows.