BIT Investment Research: US Debt Approaching $40 Trillion, Why Are Funds Starting to Eye Gold and Bitcoin?

The market is currently facing dual pressures from the expanding U.S. national debt and rising Treasury yields. The total outstanding public debt of the U.S. 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 further exacerbated this issue by adding inflationary pressure. Higher financing costs could push up government interest payments and create demand for more borrowing and fiscal spending, worsening the debt growth trajectory.

Meanwhile, foreign demand for U.S. Treasuries is also shifting. Japan may be selling U.S. Treasuries to support its rapidly depreciating yen, while China continues to diversify its foreign exchange reserves, gradually reducing its allocation to U.S. bonds and increasing its gold reserves. The continuous issuance of bonds by large-cap U.S. tech companies is also diverting market demand away from Treasuries. As foreign demand for U.S. debt changes, refinancing pressures rise, and inflation concerns persist, the risk of further increases in U.S. Treasury yields is growing.

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

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

The S&P 500 index is currently still in an uptrend, with a key level in the trend model at 7,363 points and the latest reading at 7,526 points. However, it has entered a consolidation phase 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 weaker period. If the index pulls back to around 7,000 points, technical conditions might form a more favorable setup for a reversal. With the U.S. midterm elections approaching in November, policy uncertainty could also prompt fund managers to increase their cash positions.

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 a previous symmetrical triangle pattern. If it fails to move back into that range and reclaim the upper boundary, the risk of a further pullback to around 26,500 points increases. One of the major drivers behind the rally in tech stocks was the massive capital expenditure and growth expectations of large-cap tech companies, but these enormous capex outlays have pushed their free cash flow into negative territory. Against the backdrop of a hawkish Fed stance and inflationary pressures spreading to more categories, the pressure on the stock market is intensifying.

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

As U.S. debt continues to expand, the deviation 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 original purposes is to hedge against the persistent inflation of sovereign debt. Looking at the long-term trend, as U.S. government debt has steadily climbed, Bitcoin has generally followed a similar upward trajectory, although it has been 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. Concurrently, both gold and Bitcoin are breaking upward through their recent downtrend lines. If U.S. debt surpasses $40 trillion and the 10-year Treasury yield moves further towards 5.0%, the valuation and capital flow pressures on the stock market could intensify. In this scenario, gold and Bitcoin could benefit from increased investor demand for alternative and safe-haven assets.

Overall, the market is currently forming a set of mutually reinforcing macroeconomic variables: U.S. government debt is approaching $40 trillion, a large amount of debt faces refinancing at high interest rates, major foreign holders like Japan and China may further adjust their Treasury allocations, and the 10-year Treasury yield is nearing the critical 5.0% level. As Treasury yields rise, bonds become more attractive relative to stocks, placing greater capital and adjustment pressure on equities, particularly tech stocks.

For investors, the next focus isn't just whether U.S. debt breaches $40 trillion, but more importantly, whether the 10-year Treasury yield can continue its ascent towards 5.0% and the resulting shifts in capital flows. If the stock market comes under further pressure while gold and Bitcoin sustain their break above the recent downtrend lines, capital may gradually rotate from stocks into gold and Bitcoin, driving a new cross-asset rotation.

Some of the above views are from BIT on Target. Contact us to get the full BIT on Target report.

Disclaimer: Market conditions involve risk. Investment requires caution. This article does not constitute investment advice. Digital asset trading can involve extremely high risk and volatility. Investment decisions should be made after careful consideration of individual circumstances and consultation with financial professionals. BIT is not responsible for any investment decisions made based on the information provided in this content.