Allianz Economists: Why investors are starting to buy bitcoin instead of bonds

Are U.S. government bonds really the best "safe-haven" asset, or Bitcoin?

In an interview with CNBC last week, Allianz economists said that as global war and conflict heat up, the market is shifting from bonds to assets such as bitcoin as a "safe haven" store of value.

The analyst at the $2 trillion financial services firm explains why the Treasury market has been so volatile this month and why he thinks the U.S. will fall into recession in early 2024.

Explaining the Treasury Sell-off

Mohamed Erian, chief economic adviser at Allianz, said the Treasury market had lost its benchmark price data that could be biased by its economic, policy and technical "anchor" markets.

In addition, the economist expects that the supply of Treasury bonds in the market will continue to increase as the government issues more debt, and the Fed remains a net seller of such debt.

"The question mark is: Who will buy it?" El-Errien said on Thursday. "This problem for buyers is not going away anytime soon. Given the situation with the supply of government debt, buyers are hesitant and they should be hesitant too. ”

Since last year, the Fed has been steadily shrinking its balance sheet to pump money out of the economy and help combat soaring inflation. With inflation yet to reach the Fed's 2% target, more sell-offs are expected, pushing bond yields higher.

At the same time, the U.S. government was forced to drop the debt ceiling in June, and the total government debt now exceeds $33 trillion. In August, Fitch Ratings downgraded the government's debt rating to AA+, citing its persistent deficits, political gridlock, "weak government revenues, new spending initiatives, and higher interest burdens".

El-Elrian noted that high interest rates are bad for businesses and governments, increasing the risk of a recession in 2024, while savings generally fall.

Why Bitcoin? **

Asked if investors and governments would reinvest in bonds as a "safe haven" as geopolitical conflicts begin to take hold, El-Elrien said the data doesn't prove it. In fact, the yield on the 10-year Treasury note has risen since the conflict between Israel and Hamas erupted earlier this month.

"Considering what is happening in the world, we have not yet seen the trend in the pursuit of quality and safety that people expect," the economist said. ”

"People talk about Bitcoin, they talk about stocks as 'safe assets' because they have lost confidence in government bonds as safe assets," he continued. "It's because of the nature of interest rate risk."

Bitcoin surged to a yearly high of $35,000 last week, rising sharply along with gold. While some see the rally as an excited reaction to the upcoming launch of a spot Bitcoin ETF, BitMEX co-founder Arthur Hayes believes investors are turning to Bitcoin and gold as the market loses confidence in the quality of government bonds.

"If they rise when Treasury yields are soaring, tell me that both safe-haven assets are underestimating the future of higher government spending and higher inflation," Hayes wrote at the time. ”

Earlier this month, BlackRock CEO Larry Fink called Bitcoin's rally a "leap toward quality."