Bitcoin, Stocks Bleed as China Rate Cuts Signals Panic, Treasury Yield Curve Steepens

China’s surprise interest rate cut signals panic, increasing risk aversion in the market.

One observer said the biggest risk was a steepening U.S. Treasury yield curve.

Risk assets fell on Thursday as China cut interest rates for the second time in a week, raising concerns about instability in the world’s second-largest economy.

Bitcoin {{BTC}}, the leading cryptocurrency by market cap, was down nearly 2% as of midnight UTC to around $64,000, and ether {{ETH}} was down more than 5%, dragging the broader altcoin market lower. The CoinDesk 20 Index (CD20), a measure of the broader crypto market, is down 4.6% in 24 hours.

On stock markets, Germany’s DAX, France’s CAC and the euro zone’s Euro Stoxx 50 indexes were down more than 1.5%, while futures tied to the tech-heavy Nasdaq 100 index were slightly lower after the index fell 3% on Wednesday.

Earlier on Thursday, the People’s Bank of China (PBoC) injected 200 billion yuan ($27.5 billion) of liquidity into the market by surprisingly cutting the rate on its one-year medium-term credit facility to 2.3% from 2.5%, the biggest cut since 2020.

The move, along with similar cuts in other borrowing rates earlier this week, suggests an urgency among policymakers to support growth after the latest third plenum offered little hope of an increase. Data released earlier this month showed China’s economy grew at an annual rate of 4.7% in the second quarter, much weaker than the 5.1% forecast and slower than the 5.3% in the first quarter.

“Stock futures are holding steady after yesterday’s bloody session that shook sentiment across all asset classes,” Ilan Solot, senior global strategist at Marex Solutions, wrote in a note shared with CoinDesk. “The surprise move by the PBoC to cut interest rates has further fueled the sense of panic.” A division of global finance platform Marex, Marex Solutions specializes in creating and distributing customized derivatives products and issuing crypto-linked structured products.

Solot, in line with CoinDesk’s reporting earlier this month, noted that the “steepening” of the U.S. Treasury yield curve poses a threat to risky assets, including cryptocurrencies.

The yield curve steepens when the spread between long-term and short-term bond yields widens. This month, the spread between 10-year and two-year Treasury yields widened by 20 basis points to -0.12 basis points (bps), primarily due to stickier 10-year yields.

The so-called reversal or re-steepening (or negative spread) situation has historically coincided with risk aversion.

The story continues

“The biggest concern for me is the shape of the US yield curve, which continues to steepen. The 2-year and 10-year curves have not only inverted -12bps compared to -50bps last month. Recent moves have been driven by the bullish back end [10y] “It’s the yields and the short-term ones that are falling,” Solot said.

That’s a sign that markets expect the Fed to cut interest rates, but see tighter inflation and expansionary fiscal policy as rising risks, Solot said.