US Treasury Secretary releases water vs the Federal Reserve downsizing, Bitcoin falls into a new macroeconomic crackdown

According to Woofun AI, the US macroeconomy is experiencing a rare policy deviation: the Federal Reserve stopped injecting capital into the market and maintained high interest rates, while the US Treasury invested heavily in liquidity through large-scale repurchase operations. With this radically different direction of operation, Bitcoin is facing a very special new macro-environment. The traditional narrative of monetary easing has been broken and replaced by a complex game between fiscal and monetary policies in the bond market, directly impacting the pricing basis of crypto assets.

The trigger for this macroeconomic shift began on August 19, when the US Treasury announced a key move aimed at restoring the liquidity of long-term treasury bonds. Starting September 9, the maximum repurchase operation limit for government bonds with a maturity period of 10 to 30 years will be doubled, that is, the limit for each operation will be raised from $2 billion to $4 billion.

At the same time, although the question of how long interest rates should remain high is no longer being discussed, and the focus is on whether interest rates should be raised further, the Federal Reserve has kept the target interest rate range between 3.50% and 3.75%. At first, Washington seemed to be putting two very different kinds of pressure on the bond market: the Federal Reserve is trying to raise the cost of capital in the entire economy, while the US Treasury is trying to increase the liquidity of those longer-term government bonds.

Although the two have different responsibilities, borrowers and investors will feel both effects at the same time, as these factors affect many areas, from mortgage pricing to Bitcoin prices. This situation indicates that the announcement did not result in a long-term change in the rate of return required by investors to provide loans to the government.

According to data compiled by Woofun AI, people often think that after the Federal Reserve selects an interest rate value, other institutions in the financial industry only need to adjust it, but in reality this is only the case in the shortest period of the money market — at that level, the central bank will pay interest on reserves and keep the federal funds rate within a set range through overnight operations.

However, the yield on 30-year US Treasury bonds is determined by a combination of more complex factors. Investors will first estimate the average short-term interest rate over the next few decades, then consider inflation, and then demand additional compensation due to the unpredictability of the federal government's borrowing behavior and economic trends. Economists call this additional compensation a “term premium,” which is essentially the cost of waiting for a long time.

This difference helps explain the recent sell-off in the bond market: the minutes of the Federal Reserve's meeting show that nominal US Treasury yields rose by 25 to 30 basis points during the July meeting, and the main driver was rising real yields. Since inflation expectations change less, investors demand higher returns after excluding inflation factors. The market also previously anticipated that the Federal Reserve would raise interest rates by 25 basis points at the September meeting and then raise it again at the end of the first quarter of 2027. Bitcoin can quickly sense this change because the true rate of return tells investors how much they can earn with little to no credit risk. Since Bitcoin itself doesn't bring any returns, government bonds that can provide rich returns above the level of inflation will be more attractive in comparison. The same logic applies to technology stocks that base their valuation on earnings after a few years — because higher real yields will cause these future earnings to become more discounted when denominated in current dollars.

The US Treasury faces a different problem, because US congressional decisions determine the federal government's spending scale and tax revenue, which forces debt managers to finance the funding gap, refinance maturing bonds, and ensure that US government debt can continue to be the world's main source of collateral. And when the Federal Reserve also began asset purchases, the division of labor between the two institutions became more complicated: the Federal Reserve would buy treasury notes and, if necessary, other government bonds with maturity within 3 years to ensure that the banking system has sufficient reserves. This kind of buying can coexist with tight policy interest rates, allowing the Federal Reserve to provide overnight funding while maintaining high interest rates; while the US Treasury can still support long-term bond transactions while issuing far more bonds than repurchases.

The key is when bonds expire: the Federal Reserve determines the price of short-term capital, the US Treasury determines the size and composition of federal debt, and private investors connect the two by deciding how much compensation is needed at every step in between. Although the US Treasury's buyback operation may sound powerful, as if the debt has actually disappeared, it is actually more like converting one form of debt into another: the Treasury sells new benchmark bonds, uses part of the cash to buy back old bonds, and at the same time provides liquidity for bonds that are difficult to trade. Newer bonds are the current benchmark, while those that are old and difficult to trade may deviate from surrounding prices and take up limited space on brokers' balance sheets.

This plan can improve the liquidity of old bonds, reduce the risk that brokerage firms will be forced to exit the market when the market fluctuates, and at the same time will hardly change the overall supply of federal debt. This also distinguishes the program from quantitative easing (QE) — because when the Federal Reserve expands its balance sheet, it achieves this goal by creating reserves and purchasing securities as part of implementing monetary policy; while the US Treasury uses its own accounts to supplement these funds through taxation or borrowing, its buyback operation simply rearranges the government's debt structure without altering the central bank's money supply. Looking at the overall scale, the difference between the two is even more obvious: in the repayment plan proposed on August 5, the US Treasury plans to spend up to 38 billion US dollars to buy hard-to-trade bonds during this quarter to provide liquidity support, and will also invest 25 billion US dollars to buy short-term bonds for fund management.

Although the $4 billion repurchase operation can help brokerage firms cope with some of the market's difficulties, the huge supply of debt still determines the underlying price of the market. The yield on long-term bonds will also be affected by multiple factors at the same time: the federal government's deficit is competing for limited savings resources, while the development of the artificial intelligence industry is directing large amounts of capital to data centers and electricity supply. Investors must consider decades of inflationary risk and political risk, while brokerage firms and foreign exchange reserve managers are limited by their own capabilities. The yield on 30-year bonds combines all of these uncertainties into a single value, which explains why neither the Federal Reserve nor the US Treasury can control this value alone.

Bitcoin usually first feels the impact of the Federal Reserve's policy trends, as higher policy interest rates are expected to increase the attractiveness of cash, strengthen the US dollar's position, and increase the cost of holding leveraged cryptocurrency positions. The US Treasury, on the other hand, affects the price of Bitcoin by affecting market liquidity and fiscal credibility, because large-scale bond issuance will attract capital into government auctions, and depending on the US Treasury's general account status and reserve levels, it may reduce the available space on brokers' balance sheets to take risks. Over a longer period of time, continuing fiscal deficits and growing federal government debt burdens will increase people's motivation to hold scarce assets that are not covered by sovereign balance sheets.

However, this impact is showing much more slowly than the sell-off in the bond market. Bitcoin's performance may be similar to a long-term risk asset during the week when real yields suddenly rise, but then it will receive long-term support from investors who don't trust fiscal policies that lead to higher yields. All of this suggests that we should view the yield of various types of bonds as an interrelated overall system: the yield on 2-year bonds reflects the market's expectations for the direction of the Federal Reserve's policy, while the yield on 10-year and 30-year bonds reflects the compensatory effects of debt supply and maturity. Washington's decision affects an important part of this system: the Federal Reserve can raise the cost of overnight funding, and the US Treasury can decide which bonds to issue or buy back. As for the long-term bond market, it is dominated by investors who are willing to invest money for years to come. Currently, Bitcoin is being traded in this market. On the one hand, it has to face monetary policy restrictions imposed by Washington, and on the other hand, it also has to withstand pressure from fiscal policy.