BIT Research: US debt approaching $40 trillion, why are funds starting to focus on gold and Bitcoin?

The current market is facing dual pressures from the continuous expansion of U.S. debt and rising U.S. Treasury yields. The total outstanding public debt of the U.S. federal government is approaching $40 trillion, while a large amount of debt is about to mature, requiring refinancing and rollover at significantly higher interest rates. Recent inflation pressures from rising oil prices further exacerbate this issue, as higher financing costs may increase government interest expenditures and create more demand for borrowing and fiscal spending, worsening the debt growth trajectory.

At the same time, overseas demand for U.S. Treasury bonds is also undergoing changes. Japan may support the rapidly depreciating yen by reducing its holdings of U.S. Treasury bonds, while China continues to promote diversification of its foreign exchange reserves, gradually reducing its allocation to U.S. Treasury bonds and increasing its gold reserves. The ongoing bond issuance by large-scale U.S. tech companies is also diverting market demand for U.S. Treasury bonds. As overseas demand for U.S. Treasury bonds changes, refinancing pressures rise, and inflation concerns persist, the risk of further increases in U.S. Treasury yields is increasing.

$40 Trillion Debt with 5% Yield: Pressure on the Stock Market is Rising

The yield on the 10-year U.S. Treasury bond has quickly risen from below 4.0% before the outbreak of the U.S.-Iran war to 4.70%, approaching recent highs. If it further approaches 5.0%, the attractiveness of bonds to capital will significantly increase. Long-term investors, such as pension funds, can lock in a nominal yield of about 5% by allocating to long-term bonds without bearing the volatility risk of the stock market, which will also increase the risk of capital flowing from stocks to bonds and putting pressure on stock valuations.

Currently, the S&P 500 index is still in an upward trend, with a key position in the trend model at 7,363 points, and the index recently reported 7,526 points. However, it has entered a consolidation phase overall over the past two months, and recent upward momentum has weakened. The smoothed moving average of the weekly RSI is still declining, and August to September is typically a seasonally weak performance period. If the index retreats to around 7,000 points, more favorable reversal conditions may form technically. As the November U.S. midterm elections approach, policy uncertainty may also prompt fund managers to increase cash positions.

The pressure faced by tech stocks is more pronounced. The Nasdaq index is currently operating below the 21-day moving average of 29,477 points and has broken below the previous converging triangle pattern; if it cannot return to that range and reclaim the upper boundary, the risk of further retracement to around 26,500 points will increase. One of the key forces driving the rise of tech stocks previously was the massive investments and growth expectations of large-scale tech companies, but the enormous capital expenditures have pushed these companies' free cash flow into negative territory. Against the backdrop of the Federal Reserve adopting a hawkish stance and inflation pressures spreading to more categories, the pressure on the stock market is increasing.

From Stock Pressure to Asset Rotation: Gold and Bitcoin May Regain Investor Attention

As U.S. debt continues to expand, the divergence between Bitcoin and the trend of debt growth has widened to levels comparable to those during the Bitcoin bear market in 2022. One of the core intentions behind the creation of Bitcoin was to hedge against the risks of sovereign debt expansion. From a long-term perspective, while U.S. government debt continues to rise, Bitcoin has also generally moved higher in a similar direction, albeit with periods of overvaluation or undervaluation relative to the trend of debt growth.

Gold is also showing noteworthy technical signals. Its weekly RSI has dropped to levels that historically often appear before strong rebounds, and both gold and Bitcoin are breaking upward through recent downward trend lines. If U.S. debt surpasses $40 trillion and the yield on the 10-year U.S. Treasury bond further approaches 5.0%, the valuation and liquidity pressures on the stock market may continue to increase, while gold and Bitcoin may benefit from rising demand for alternative and safe-haven asset allocations.

Overall, the current market is forming a set of mutually reinforcing macro variables: U.S. government debt approaching $40 trillion, large-scale debt facing high-rate refinancing, overseas holders like Japan and China potentially further adjusting their U.S. Treasury bond allocations, and the 10-year U.S. Treasury yield nearing the critical level of 5.0%. As U.S. Treasury yields rise, the attractiveness of bonds relative to stocks increases, putting greater funding and adjustment pressure on stocks, especially tech stocks.

For investors, the focus should not only be on whether U.S. debt will surpass $40 trillion, but more importantly, whether the yield on the 10-year U.S. Treasury bond can continue to rise towards 5.0%, and the resulting changes in capital flows. If the stock market faces further pressure, while gold and Bitcoin continue to break through recent downward trend lines, capital may gradually shift from stocks to gold and Bitcoin, driving a new round of cross-asset rotation.

The above views are partly derived from BIT on Target, Contact us for the complete report of BIT on Target.

Disclaimer: The market carries risks, and investment should be cautious. This article does not constitute investment advice. Trading in digital assets may involve significant risks and volatility. Investment decisions should be made after careful consideration of personal circumstances and consultation with financial professionals. BIT is not responsible for any investment decisions made based on the information provided in this content.