CC Looks at the World | An article to help you understand how U.S. debt affects Bitcoin's trend

Author: Louis, ChainCatcher

Editor: Crypto Luo Xiaohei, ChainCatcher

In the first half of 2025, the U.S. Treasury market experienced severe turbulence. Credit rating downgrades, lukewarm auctions, and record-high fiscal deficits… These events not only reshaped the global asset allocation landscape but also made the relationship between "U.S. Treasuries and Bitcoin" a new focus in the crypto market. Bitcoin, once regarded as a "speculative asset," is increasingly seen as "digital gold." However, whether this attribute holds true fundamentally depends on its ability to demonstrate stability and safe-haven functionality during times of global liquidity tightening. As a liquidity anchor, the movements of U.S. Treasuries and interest rate policies are becoming unprecedentedly significant for Bitcoin.

++This issue of CC++ ++Looking at the World++ will straightforwardly explain how U.S. Treasuries impact Bitcoin price movements.++

What are U.S. Treasuries?

U.S. Treasuries are debt instruments issued by the federal government to cover fiscal deficits, known as "the safest asset in the world." Since the U.S. dollar is the world's reserve currency, Treasuries naturally have a wide range of international buyers, and their yields often serve as an important reference for global asset pricing. Changes in Treasury yields typically reflect market expectations regarding macro factors such as inflation, interest rate policies, and government credit. As the foundation of the risk-free rate, changes in Treasuries can influence capital costs, asset pricing, and even global capital flows through multiple channels.

What is a "healthy" U.S. Treasury?

From the perspective of yield levels: The 10-year U.S. Treasury yield is generally regarded as the anchor for the global risk-free rate, and a reasonable yield level should reflect a balance between economic growth and inflation. ++Generally speaking,++++2.5%++ ++to 3.5%++ ++is considered a relatively "++ ++healthy"++ ++range: this level is sufficient to provide compensation for future inflation without excessively raising financing costs, thus suppressing investment and consumption.++ When yields are too low (e.g., <2%), it often indicates market expectations of economic stagnation or systemic risk; conversely, when yields consistently exceed 4.5%, it typically signifies significant inflation pressure or doubts about fiscal credit, potentially triggering turmoil in global capital markets. Therefore, maintaining a neutral to slightly higher interest rate level helps stabilize global investors' confidence in the U.S. economy.

From the perspective of the yield curve: The shape of the yield curve (i.e., the relationship between short-term and long-term rates) can reveal market expectations regarding future economic cycles. ++Under normal circumstances, long-term rates are higher than short-term rates, reflecting moderate upward expectations for future economic growth and inflation, which is a++++"++ ++healthy curve"++; when short-term rates exceed long-term rates, indicating an "inverted" curve, it is typically seen as a precursor to economic recession. Over the past few decades, every instance of an inverted curve has been accompanied by economic slowdown or recession. Currently, if the 10-year rate is within a healthy range but the curve remains inverted, it indicates market concerns about short-term policy tightening and a lack of confidence in long-term growth. Therefore, assessing whether U.S. Treasuries are "healthy" requires not only looking at the level of interest rates but also considering whether their structural logic is reasonable.

What are the core changes in U.S. Treasuries in 2025?

1. Debt ceiling and fiscal deficit: At the beginning of 2025, the U.S. government reset the debt ceiling to $36.1 trillion and further increased it in May through the "Great Beautiful Act." Although the risk of default was avoided, the fiscal deficit further expanded, raising widespread investor concerns about debt sustainability.

2. Credit rating downgrade: On May 16, Moody's downgraded the U.S. sovereign rating from "Aaa" to "Aa1" for the first time, marking the first collective downgrade of the U.S. rating by the three major rating agencies, signifying a shift in market perception of Treasury safety.

3. Weak auctions and rising yields: The results of U.S. Treasury auctions in May were often "lukewarm," with the market demanding higher yields to take on the bonds. This directly increased government financing costs and squeezed the attractiveness of other assets.

4. Reduction in overseas holdings: By the end of March 2025, China's holdings of U.S. Treasuries fell to $765.4 billion, a multi-year low. Japan and the UK are also reducing their holdings. This may weaken demand support for Treasuries, making the market more reliant on domestic funds.

5. Inflation and monetary policy dynamics: Although the U.S. GDP recorded -0.3% in the first quarter, increasing expectations of economic downturn, high inflation remains unresolved. Whether the Federal Reserve will cut interest rates has become the biggest suspense in the market for the next two months.

Impact of U.S. Treasuries on global liquidity and risk assets

As the benchmark for global risk-free rates, changes in U.S. Treasury yields directly affect global capital costs. Typically, as shown in the chart below, when the supply of Treasuries increases and yields rise, global capital tends to flow toward low-risk assets like Treasuries, leading to tightened liquidity in other markets. Reduced liquidity puts pressure on high-risk assets (such as cryptocurrencies, tech stocks, and venture investments), causing weaker performance; conversely, if Treasury rates decline or the market anticipates a loosening of Federal Reserve policies, it can release global liquidity and boost the risk investment market. Thus, U.S. Treasuries determine the direction of global liquidity and are becoming an important barometer for risk asset trends.

Impact of U.S. Treasuries on Bitcoin prices

Due to the high correlation between global liquidity and Bitcoin prices, the core lies in the market's dynamic judgment of "funding costs" and "risk appetite":

• If current economic data shows strong employment coupled with high inflation, the market will expect the Federal Reserve to maintain high rates to suppress inflation, leading to rising Treasury yields and increased funding costs, ultimately creating a tightening liquidity situation that is bearish for Bitcoin.
• Conversely, when interest rates are already high, market risk appetite declines, capital flows back to the bond market, further compressing the activity in the crypto market, which is also bearish for Bitcoin. However, during periods of frequent risk events or rising doubts about sovereign credit, Bitcoin may sometimes strengthen in the short term, supported by its positioning as "digital gold."
• On the other hand, if the market bets on early interest rate cuts, it implies future liquidity will be released and Treasury yields will decrease, lowering funding costs, which benefits risk assets overall, and Bitcoin often rises accordingly.

However, it is important to note that the uncertainty in the Federal Reserve's policy statements often leads to significant market sentiment fluctuations, causing Bitcoin to potentially exhibit unexpected reactions in the short term. **Therefore, the logic of Bitcoin prices is not simply a one-way correlation with interest rates but is nested within the complex chain of *"macroeconomic expectation changes → liquidity judgments → funding behaviors."*