JGB 17-year yield increase challenges Bitcoin at $123k; is risk aversion returning?

Japan’s 10-year government bond (JGB) yields have reached heights not observed since 2008, creating a situation that influences Bitcoin through spot depth and order-book dynamics rather than through direct correlation.

The selloff in long-term Japanese government bonds is driving domestic yields upward, diminishing the motivation for Japan’s institutional investors to pursue returns in international markets.

Life insurers have indicated a preference for domestic yen-denominated assets in recent quarters, and the recent surge in yields accelerates this trend.

As Japanese capital withdraws from foreign risk positions, global dollar liquidity experiences a slight contraction, which impacts risk assets, including equities and cryptocurrencies.

How JGB yield increase pressures Bitcoin

Investors have abandoned Japanese bonds as political and fiscal uncertainties rise, leading to the yield increase that now redirects institutional investments. The simultaneous decline of the yen adds to the pressure.

A weaker yen supports a stronger dollar, and this combination compels de-risking across carry trades and leveraged strategies.

Increased hedging costs and broader rate differentials render leveraged positions costly to sustain, draining liquidity from exchanges and resulting in more mechanical price movements in Bitcoin.

This week, the dollar strengthened as the yen weakened, illustrating the dynamic that reduces spot market depth and heightens volatility.

Periods of dollar strength and tighter financial conditions have consistently coincided with diminished spot liquidity and heightened short-term volatility. As a result, a robust dollar tends to have an inverse relationship with Bitcoin, frequently leading to corrections.

Intraday chart comparing Bitcoin, DXY and JGB.

This trend is significant now because thinner order books result in price movements that are more influenced by flow and less tied to fundamental demand.

If the Bank of Japan (BOJ) intensifies hawkish statements to counter yen depreciation, rate differentials could adjust sharply, introducing new volatility into risk assets.

As noted by Reuters recently, a former BOJ official mentioned that the yen’s decline might lead the central bank to raise rates in October, a decision that would narrow spreads with US yields and potentially reduce the dollar’s strength.

ETF demand holds for now

According to Farside Investors’ data, US-traded spot Bitcoin ETFs garnered $2.1 billion in net inflows between Oct. 6 and Oct. 7, indicating strong demand even as macroeconomic conditions tighten.

On Oct. 7, the funds withdrew $875.6 million despite Bitcoin experiencing a 2.4% correction and briefly dropping below the $121,000 mark before recovering to close at $121,368.23.

This resilience implies that ETF flows can mitigate the effects of dollar strength and liquidity constraints in the short term, although the sustainability of this offset relies on whether inflows continue at their recent pace.

Two opposing factors will influence how much longer ETF demand can withstand macro pressures. First, if the multi-billion-dollar weekly inflow rate diminishes, the effects of dollar strength and yen weakness on Bitcoin liquidity will become more evident.

Second, if the BOJ tightens, the US-Japan rate differential could narrow, leading to a decline in the dollar’s strength, thereby alleviating the pressure on risk assets and restoring some spot depth. Consequently, ETF inflows remain robust but are sensitive to changes in the dollar and real-yield landscape for the time being.

Inflow data from Oct. 8 will provide further insight into how investors are responding to the latest combination of rising JGB yields, yen depreciation, and a stronger dollar.

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