Bitcoin surged past Tuesday this week as the dollar fell after the Bank of Japan suddenly raised the cap on the 10-year Japanese government bond yield to 0.5% from the previous 0.25%, ending the protracted period of near-zero interest rates.
The banking institution’s governor, Haruhiko Kuroda, indicated that the cap on 10-year government bonds would be increased to 50 basis points over or below the zero percent aim.
“Today’s step is aimed at improving market functions, thereby helping enhance the effect of our monetary easing,” it’s therefore not an interest rate hike,” Kuroda stated.
In order to manage bond yields in close proximity to a predetermined target level, the central bank of Japan has been employing a strategy known as yield curve control (YCC), which entails buying and selling bonds.
The financial institution may be able to purchase bonds at a target price that coincides with the target yield in order to keep yields low. Alternatively, a central bank may also sell bonds at a specified price in order to prevent these yields from falling too far.
The S&P 500 dropped almost 1% as a result of the Bank of Japan’s unexpected news, and the Nikkei, Japan’s benchmark equities market, fell nearly 3%. The Japanese Yen increased against the US Dollar by more than 2%. While the 10-year Treasury Yield increased by almost 10 basis points to 3.69%, the yield on 10-year Japanese government bonds increased from 0.22% to 0.43%.
After the Bank of Japan upped the ceiling on yields paid by long-term government bonds, Bitcoin soared past $17,000. The digital currency somewhat declined after this significant rise and was trading close to $16,800 at the time of writing.
What impact does these types of announcements have on markets?
As interest rates increase, risky assets like stocks, cryptocurrencies, and real estate perform poorly. More enticing yields are offered through certificates of deposit, government bonds, and treasury bills. Investors in stocks are less likely to bid up stock prices when interest rates rise because future quarter earnings appear to be less valuable compared to bonds that currently offer more appealing yields.
On the other hand, as interest rates decline, it becomes simpler for institutions to borrow money, leading to the issuance of lower-yielding debt. The market’s demand causes higher-coupon bonds to grow concurrently, driving up their prices and driving down their yields.
The most crucial thing for investors to keep in mind is that not all assets will decline just because interest rates are rising. When interest rates are rising, some assets do well.
Final Thoughts
Although there is a pretty indirect relationship between interest rates and the stock market, the two often move in different ways. As a general rule, the markets rise when the Federal Reserve lowers interest rates, and they decline when the Federal Reserve raises interest rates. However, there is no assurance as to how the market will respond to any particular adjustment in interest rates.
The same is true for the cryptocurrency markets. However, cryptocurrencies and the US dollar move inversely correlated to the US Dollar Index (DXY) as it is of fixed supply and most commonly traded against the US Dollar more than any other currency. As a result, the Bank of Japan’s announcement caused the US dollar to decline and cryptocurrencies like Bitcoin to rise.
Rickie Sanchez is an article writer specializing in cryptocurrency news. Since late 2017, he has been actively investing in cryptocurrencies. He is enthusiastic about everything that has to do with crypto and he hopes that the readers of his articles in the years to come will gain a massive understanding of blockchain technology.
