Treasury Buybacks vs Fed Hikes: How the Government's Moves Are Affecting Bitcoin

The recent rally in Bitcoin started when the Treasury Department announced it would double the maximum size of certain buyback operations for government bonds with 10 to 30 years left to maturity. This move, combined with the Federal Reserve's decision to hold interest rates steady at 3.50% to 3.75%, has had a significant impact on the market.

The Fed's minutes from its July meeting revealed that three members voted for a quarter-point rate increase, and many others thought another hike would be needed if inflation failed to retreat. This led to higher real yields, which in turn made government bonds more attractive to investors.

However, the Treasury's buyback operation is not as effective as it seems. The $4 billion cap on selected long-bond buybacks is a small fraction of the total $739 billion of privately held net marketable borrowing expected from July through September. This means that the government still owes the replacement debt, and new issuance replaces the securities being repurchased.

The impact on Bitcoin has been significant, as higher real yields make holding risk assets more expensive by comparison. The 30-year Treasury yield closed at 5.28% on Aug. 18, fell to 5.19% on the announcement day, then returned to 5.27% by Sept. 2.