While the U.S. government is stuck in a deadlock over raising its $31.4 trillion debt ceiling, the markets are hesitant. Some analysts have argued against the consensus and warned that a possible deal could hurt the crypto market.

This ensured that assets like bitcoin, which are sensitive to swings in the U.S. dollar liquidity and fears of a return to default by the U.S. government, remained bid amid fears. This ensured that assets such as bitcoin, which is sensitive to swings in U.S. Dollar liquidity, remained in demand amid fears of government failure and the Federal Reserve’s continuing rate hikes.

MacroMicro reports that the TGA balance fell from approximately $500 billion in early February to $68.8 billion last week. According to Goldman Sachs Treasury’s cash will dip to the required minimum of $30 billion by early June. This means that a deal must be made to avoid what many believe to be a catastrophic debt default.

This also means that, once the debt ceiling is raised by the Treasury, it will issue government bonds to rebuild its cash balance. This could drain liquidity from the market and increase bond yields, as increased issuance tends to drive prices down and raise yields. Bitcoin ( BTC), is known to move the opposite way of bond yields.

While a deal could eliminate major economic uncertainties, assets such as bitcoin, which have no links to the real-economy and are heavily reliant on fiat currency liquidity, may actually suffer.

In the weekend edition, Noelle Acheson said that the issuance of debt in order to fill up the coffers would have the opposite impact – the money will be moved from cash and risky assets to U.S. Government bonds. This is especially true as the yields of these instruments will rise in order to counteract the increased supply.

She added that “this could be bad” for gold and bitcoin, as they are expected to fall in value when yields rise (high yield environments don’t tend to be good for assets with no yield). “What’s even more, issuing more U.S. Government debt would increase the public spending which would be beneficial for the economy and further delay the likelihood of rates cuts.”

The market consensus has been that defaulting would cause panic selling, and a rush for cash around the world. This is similar to what happened during the coronavirus crash in March 2020 where bitcoin dropped by more than 50%. A debt agreement is expected to boost risk-on actions.

Some observers claim that bitcoin attracted haven bids in the banking crisis of March, but other rate-sensitive investments like tech stocks performed well, as traders priced an early Fed pivot towards rate cuts. Bitcoin remains a risky asset that is primarily liquidity-sensitive.

Treasury’s current cash balance is now $68 billion. (MacroMicro) (MacroMicro)

Satyakam Gautam of the India-based ICICI Bank disagrees with this outlook. He believes that the Treasury is likely to issue $700 billion in bonds over the next few months, causing a massive fear of risk.

What it means is that there will be a shortage of USD funding, if at all successful negotiations on the ceiling are achieved. The corporate bond markets and private credit will have a hard time rolling over their existing maturities, which will result in a real crash for commercial real estate asset funding or junk bond issuers. This could be the real crash that the U.S. rates markets have been looking for,” Gautam wrote on LinkedIn.

This could lead to a massive rise in U.S. interest rates and a fall in rates on the long end. Gautam said that this should be good news for forex risk havens like JPY & CHF.

Stephen Alpher edited the book.