BIT Research: US Debt Nears $40 Trillion – Why Are Funds Turning Their Sights to Gold and Bitcoin?

The market is currently facing dual pressures from the continuous expansion of US debt and rising Treasury yields. The total outstanding public debt of the US federal government is approaching $40 trillion. At the same time, a large amount of debt is maturing and needs to be refinanced and rolled over at significantly higher interest rates. The recent increase in oil prices has exacerbated this issue by adding inflationary pressure. Higher financing costs could drive up government interest payments and spur additional borrowing and fiscal spending needs, further worsening the debt growth trajectory.

Meanwhile, foreign demand for US Treasuries is also undergoing changes. Japan may reduce its holdings of US Treasuries to support the rapidly depreciating yen, while China continues to diversify its foreign exchange reserves, gradually lowering its allocation to US Treasuries and increasing its gold reserves. The continuous bond issuance by US mega-cap tech companies is also siphoning off market demand for Treasuries. With changes in foreign demand for Treasuries, rising debt refinancing pressure, and persistent inflation concerns, the risk of further increases in Treasury yields is growing.

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

The 10-year US Treasury yield has rapidly climbed from briefly dipping below 4.0% before the outbreak of the US-Iran war to 4.70%, approaching recent highs. If it moves further towards 5.0%, the appeal of bonds for capital will significantly increase. Long-term investors like pension funds can lock in a nominal yield of around 5% by allocating to long-duration bonds without bearing the volatility risk of the stock market. Consequently, the risk of capital flowing from stocks to bonds, putting pressure on stock valuations, will also increase.

The S&P 500 index is currently still in an uptrend, with the key level in the trend model at 7,363 points. The index last closed at 7,526 points. However, it has entered a consolidation phase over the past two months, and its recent upward momentum has weakened. The smoothed moving average of the weekly RSI is still declining, and the period from August to September is typically a seasonally weaker phase. A pullback to around 7,000 points might be needed to create more favorable technical conditions for a reversal. With the US midterm elections approaching in November, policy uncertainty could also prompt fund managers to increase their cash holdings.

The pressure on tech stocks is more pronounced. The Nasdaq index is currently trading below its 21-day moving average of 29,477 points and has broken down from its previous symmetrical triangle pattern. If it fails to reclaim this level and recapture the upper trendline, the risk of a further correction towards the 26,500 point area increases. One of the key drivers behind the tech rally was the massive investment and growth expectations of mega-cap tech companies. However, these huge capital expenditures have pushed their free cash flows into negative territory. Against the backdrop of a hawkish shift by the Federal Reserve and inflationary pressures spreading to more categories, the pressure on the stock market is mounting.

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

As US debt continues to expand, the divergence between Bitcoin and the debt growth trend has widened to levels comparable to those seen during the 2022 Bitcoin bear market. One of Bitcoin's core founding principles is to hedge against the risk of ever-expanding sovereign debt. Looking at the long-term trend, as US government debt has steadily climbed, Bitcoin has also generally moved in a similar direction, albeit becoming overvalued or undervalued relative to the debt growth trend at different stages.

Gold is also showing noteworthy technical signals. Its weekly RSI has fallen to levels that historically have often preceded strong rebounds. Meanwhile, both gold and Bitcoin are breaking out above their recent downward trendlines. If US debt surpasses $40 trillion and the 10-year Treasury yield moves further towards 5.0%, valuation and capital flow pressures on the stock market could intensify. Gold and Bitcoin, however, could benefit from increased investor demand for alternative and safe-haven assets.

Overall, the current market is forming a set of mutually reinforcing macro variables: US government debt approaching $40 trillion; massive amounts of debt needing refinancing at high interest rates; foreign holders like Japan and China potentially adjusting their Treasury allocations; and the 10-year Treasury yield nearing the critical 5.0% level. As Treasury yields rise, bonds become more attractive relative to stocks, increasing capital outflow and adjustment pressure on stocks, particularly tech stocks.

For investors, the key points to watch next are not just whether US debt crosses the $40 trillion mark, but more importantly, whether the 10-year Treasury yield can continue its ascent towards 5.0%, and the resulting changes in capital flows. If the stock market comes under further pressure, while gold and Bitcoin sustain their breakouts above recent downtrend lines, capital could gradually rotate from stocks into gold and Bitcoin, potentially triggering a new wave of cross-asset rotation.

The above views are partly derived from BIT on Target. Contact us to obtain the full BIT on Target report.

Disclaimer: Market conditions carry risks, and investment requires caution. This article does not constitute investment advice. Digital asset trading may involve significant risk and volatility. Investment decisions should be made after carefully considering personal circumstances and consulting with financial professionals. BIT is not responsible for any investment decisions made based on the information provided in this content.