Bitcoin gets jiggy

Bitcoin bucked the late-week market sell-off related to the continued fallout from the banking crisis. As of this writing, Bitcoin is up over 30% for the week, which is somewhat surprising given that many risk assets were under pressure. We have long maintained that one of the unique things about bitcoin is its potential to be a digital non-sovereign store of value. It is also a bearer asset, meaning you can self custody it in cold storage. However, given its nascent nature, it has thus far been correlated to risk assets. It's interesting to see this performance divergence as the markets digest issues in the banking system.

ELI5 (Explain it like I’m 5)

• Investing in assets (stocks, bonds, commodities, etc.) involves risk (risk assets)
• The more speculative the asset, the more return potential, the more risk it has
• Bitcoin has been on the higher end of the risk spectrum as compared to other assets and has behaved accordingly
• Some believe that bitcoin’s ultimate use case is a “global store of value”
• Its also unique in that you can self custody it in a cold wallet, so you do not have to keep it at an institution like a bank or broker-dealer
• In an environment where large banks are failing, it is interesting to see bitcoin trading higher

High-yield defaults spike

February marked the third monthly increase in high-yield default rates to 1.6%, still a relatively low level historically but expected to rise further. The “Market Concern” bond list has grown by 42% from last year. High-yield bonds are issued by companies with lower credit quality and often demand a higher coupon, hence the name high-yield. Except for a spike after the pandemic's start, the default rate has been low relative to historical levels. An escalating default rate indicates a combination of a more challenging business environment and tighter financial conditions.

ELI5

• Bonds are debt instruments issued by companies
• High-yield bonds are issued by lower-credit companies
• Defaults occur when a company fails to make interest payments
• A rising default rate means more companies are experiencing financial distress
• This could be because of a slowing economy
• This can also be due to capital markets not being open for weaker companies to refinance their debt

Inflation & expectations fall

This week the Consumer Price Index (CPI), a measure of inflation, came in as expected at 6% year over year, continuing its downward trend. Later in the week, we saw the Michigan survey of forward-looking inflation expectations, which came in at the lowest levels since mid-2021. Inflation has been the thorn in the Fed’s side and is why it has been on the most aggressive hiking cycle in its history. Any data showing that inflation is abating could give the Fed a reason to pause its hiking cycle. Given the inevitable tightening of financial conditions due to the recent bank failures, markets would like to see a pause sooner.

ELI5

• Inflation is cooling
• The Fed has two mandates, price stability (predictable low inflation), and full employment
• Since inflation has been high and employment tight, the Fed has had no choice but to raise interest rates
• Their goal is to tighten financial conditions, slow the economy, and bring inflation down
• The recent bank failures will likely cause financial conditions to tighten
• As banks are under more scrutiny, they are likely to tighten lending standards
• This should slow the economy and bring inflation down
• This could give the Fed cover to pause their hiking cycle sooner

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