Treasury-inflation-linked securities (TIPS) indicate that rising real yields, not inflation, are driving market movement and affecting assets that do not offer returns, such as Bitcoin.

Key points: 

• Bond yields have been rising since the start of the war with Iran, largely attributed to inflation expectations due to energy prices.
• However, the inflation expectation for the next five years, already priced into Treasury bonds protected against inflation, is 2.2% and has been trending downward since May.
• The main factor appears to be the increase in real yields, with negative implications for non-yielding assets such as Bitcoin.

Continuation of second-quarter bond sales

After hitting local lows in early March, yields on U.S. government bonds have been falling sharply over several months. This week, following the latest meeting of the Federal Open Market Committee (FOMC), yields on 30-year Treasury bonds made  headlines  as they reached their highest level since 2007. 

In line with the 76 basis point (bps) increase in two-year Treasury yields during that period, a Federal Reserve interest rate hike in September is priced into markets at 63%,  according  to CME FedWatch.

Interest rates on U.S. Treasury bonds with maturities of 2, 10, and 30 years. Data source:  Treasury.gov

With interest rates at these high levels, investments in government bonds are, for the first time since 2019, more profitable than short selling (cash-and-carry) operations in cryptocurrency markets, according to the   latest  research from Glassnode.

US Treasury 2-year yield and carry trade operations with cryptocurrency futures. Source: Glassnode

The dominant narrative about inflation

The reason for the massive sell-off of bonds is generally attributed to inflationary pressures stemming from high commodity and energy prices. This massive sell-off of bonds, which has been ongoing for several months, coincides with the start of the war with Iran and the consequent closure of the Strait of Hormuz. Furthermore, the daily closing yields of two-year US Treasury bonds, West Texas Intermediate (WTI) crude oil, and Brent crude oil have shown a correlation since March, with a correlation coefficient of r = 0.44.

Daily closing prices for WTI and Brent crude oil relative to 2-year yields. Data sources:  fred.stlouisfed.org  , EIA

WTI crude  briefly rose again  above $85 a barrel on Thursday after President Donald Trump threatened Iran and a wave of bond selling preceded the FOMC meeting. Nothing in the conflict suggests a short-term resolution, leading some to argue that higher interest rates are being driven by inflation expectations.

WTI (West Texas Intermediate) oil price chart. Source:  Tradingeconomics.com

This has generated strong inflationary alarms in the mainstream financial press, with recent Bloomberg headlines such as "Global bonds  plummet  as rising oil prices reignite inflation threat," "US Treasury yields  hit  two-month high as oil prices rise and inflation risks increase," or "Global bond sell-off  worsens  as rising oil prices scare investors." Among cryptocurrency and precious metals investors, always attentive to inflation, this narrative is also popular. 

The market commentator and Bitcoin influencer, The Wolf of All Streets, recently posted on X:

However, the way other Treasury bonds are traded does not corroborate the narrative that bond yields are driven by inflation.

TIPS claims that the increases in interest rates are 'real'.

Although most analysts and commentators focus on regular Treasury bond yields in their analyses, Treasury Inflation Protected Securities (TIPS) have shown clear signs contradicting the inflation narrative.

A Treasury Inflation-Protected Bond (TIPS) is a standard treasury bond whose principal payment is adjusted upward based on the Consumer Price Index for All Urban Consumers (CPI-U). In addition to the inflation-protected principal, each TIPS has a fixed coupon rate. Thus, unlike a standard bond, both the principal and interest are adjusted for inflation.

When comparing the yield of a TIPS bond to that of a standard Treasury bond with the same maturity, the expectation of future CPI inflation can be estimated as the so-called equilibrium rate. And although Treasury bond yields have risen, the  five-year equilibrium rate  has fallen sharply since May. 

Five-year equilibrium inflation rate. Source:  fred.stlouisfed.org

With a breakeven rate of approximately 2.2% over five years, the Fed is expected to meet its 2% target in the medium term. However, what is most telling is that the breakeven rate has been moving in the opposite direction to nominal Treasury yields.

Although the five-year nominal yield rose 33 basis points, TIPS bond data suggests this was the result of an 84 basis point increase in  real yields  , partially offset by a  51 basis point drop  in expected inflation. While the inflation narrative remains compelling, the market points in the opposite direction. The real scenario should be an increase in real yields.

What could this mean for cryptocurrencies?

In general, the increase in "real" returns on investments in bonds and stocks, as measured by the CPI, makes non-yielding assets, such as Bitcoin, relatively less attractive to certain investors. Furthermore, the impact on the cryptocurrency market depends on the explanation for the higher real rates, of which there are several. 

Liquidation of reserves — No clear impact on cryptocurrencies.  Higher oil prices are widening the trade deficits of Asian energy importers. As oil is generally quoted and settled in US dollars, there has been a shortage in local eurodollar markets in Asia, which has put pressure on their exchange rates. The  Japanese yen  (JPY),  the Philippine peso  (PHP), and  the Indian rupee  (RBI) have needed intervention from their central banks to defend their exchange rates. As these measures are financed by the sale of US Treasury reserves, this exerts upward pressure on bond yields. Frederic Neumann of HSBC attributed  the  massive bond sell-off to currency pressure, not to a verdict on the dollar.

Destruction of demand — Negative for cryptocurrencies.  An oil price shock that persists long enough ceases to be inflationary and begins to trigger a recession. Neuberger Berman  argued  in its second-quarter forecast that investors are underestimating the impact on production caused by maintaining energy prices. The credit contraction coinciding with a recession would be detrimental to stocks and Bitcoin, severely restricting liquidity. In a clear sign of recessionary credit events, credit spreads are expected to widen. Cointelegraph reported  possible early signs of this on Wednesday  .

Investment Demand — Likely bearish for cryptocurrencies.  Real interest rates may also have reacted to expected growth and capital demand from the AI ​​sector. Government bond issuance is increasingly competing with record corporate bond issuance by AI hyperscalers. Goldman Sachs Research  projects  approximately $755 billion in AI investments in 2026 and around $920 billion in 2027. UBS  has raised  its 2026 investment-grade issuance forecast to $1.8 trillion, with technology supply rising to $360 billion based on hyperscaler projections. As cryptocurrencies are competing for a similar pool of capital and investors, this will likely put downward pressure on the sector.