As U.S. debt exceeds $35 trillion, the Treasury market is seeing unprecedented activity with $9.7 trillion in new issuance, highlighting the government's growing reliance on debt. This surge has decreased market liquidity and an inverted yield curve, where short-term borrowing costs exceed long-term rates.

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The inverted yield curve has persisted for 22 consecutive months and has historically been a reliable predictor of economic downturns. We saw this phenomenon during the 2008 financial crisis and the 2020 COVID-19 pandemic, which had significant global economic impacts. In 2024, we are witnessing an even more significant inversion, the deepest since the 2008 crisis, raising alarming concerns about a potential recession. The yield curve between the 2-year and 10-year Treasury notes has inverted sharply, reflecting investors' fears about the economic outlook amid high inflation and aggressive interest rate hikes by the Federal Reserve. Most notably, the "real" interest rate spread currently indicates a staggering 40% probability of a recession within the next 12 months – the highest probability ever recorded in the history of this metric, surpassing levels seen during previous recessions.

Who cares?

Everyone should.

Treasury yields influence the fixed-income market directly, serving as a benchmark for interest rates across various securities. They directly impact the pricing and yields of fixed-income products like corporate and municipal bonds, mortgage-backed securities (MBS), and agency bonds. When Treasury yields rise, it leads to higher yields for corporate bonds, municipal bonds, and mortgage-backed securities, resulting in increased borrowing costs and mortgage rates.

Indirectly, Treasury yields guide Federal Reserve policies, affecting broader interest rates and economic conditions. Changes in Treasury yields shape the yield curve, impacting investment strategies and economic growth expectations. As a global benchmark, Treasury yields affect international interest rates, foreign bond markets, and capital flows. They also reflect inflation and growth expectations, influencing investor decisions.

Here is a breakdown of all the major fixed-income products and their performance over the past five years.

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Now compare that to the inflation rates for the past few years, and we start seeing a problem. Traditional fixed-income options have barely delivered returns to beat average inflation in the past five years.

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This begs the question: Is there a fixed-income product that is not tied to the Federal Reserve lending rate or a T-Bill as a benchmark, that is outperforming inflation, and that is more aligned with the free market? Something capable of delivering 8-10%+ returns?

The Rise of Crypto Lending Markets‍

The rapid growth of crypto lending markets has resulted in significant wealth for early investors in digital assets. With a market capitalization of $3 trillion and a range of economic opportunities, including private credit markets, this new asset class offers the potential for higher returns than traditional investment vehicles. As the digital asset space continues to expand and mature, it presents an exciting opportunity for investors to capitalize on. 

In this ecosystem, borrowers can leverage cryptocurrency as collateral, providing access to liquidity without having to sell assets. These loan products provide institutional borrowers with much-needed capital for business operations, with borrowing rates typically ranging from 10-16% for Bitcoin and Ether, based on risk profile, volume, and collateral. 

The market has made strides in risk management and added insurance products, making it secure for digital asset-backed loans. Investors can confidently embrace these fixed-income products, reaping higher yields while taking advantage of the market's high liquidity and adaptable trading environment - allowing diversification from traditional treasury bills. 

Wealth Preservation: Embracing New Opportunities‍

It is crucial for astute investors to adapt their wealth preservation strategies to ensure resilience and sustainability. The substantial increase in money supply strongly suggests that higher inflation is imminent, compelling investors to urgently seek out more robust alternatives for both the short and long term. As the bond market grapples with heightened volatility, it is evident that the digital asset space presents a unique opportunity. Specifically, investors must capitalize on debt-based products within the cryptocurrency ecosystem for potentially higher yields than traditional Treasury bills. 

At Asaari, we are building the next generation of fixed-income products. As cryptocurrency adoption continues to grow, we anticipate significant growth in the private credit market for digital assets. Bitcoin and digital assets are becoming the safest assets to borrow against, with governments and institutions ultimately becoming liquidity providers for these assets. 

For now, this emerging market of crypto-adjacent loan products offers attractive returns, high liquidity, 24/7 accessibility, and fungibility, presenting a compelling and strategic choice for those aiming to optimize their investment strategies.

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#DigitalAssets #TreasuryMarkets #YieldOpportunities