U.S. Bond Buybacks Release Liquidity! Arthur Hayes Bets on 'These 4 Cryptocurrencies' for the Bull Market

Author: Ariel, Crypto City

Same Yet Different? Arthur Analyzes U.S. Long Bond Buybacks

Recently, the U.S. Treasury announced it would expand its buyback of long-term bonds, driving up hard assets like Bitcoin and gold. Notably, Bitcoin surged over 20% in a week, breaking through the $80,000 mark, leading the market to wonder if a "new bull market" is on the horizon.

In response, Arthur Hayes, former CEO of BitMEX and founder of family office Maelstrom, published a new article on August 25 titled "Same Same But Different." He focuses on the operational strategies of current Treasury Secretary Scott Bessent and former Treasury Secretary Janet Yellen, analyzing how both faced pressure from bond yield rates and adopted similar liquidity operations, which he believes are key drivers for Bitcoin's rise.

Commonalities Between Two U.S. Treasury Secretaries

Hayes begins his article with a fictional nightclub scene, describing how Bessent and Yellen, despite being from different government teams and having previously criticized each other’s ideologies, ended up following the same path in practice.

He argues that both had to deal with the pressure from politicians to continuously expand spending, ultimately choosing to utilize the Treasury's operational tools to print money and lower bond yields, thereby injecting dollar liquidity into the market, which would eventually flow into Bitcoin and other crypto assets.

10-Year Bond Yield of 5% is the Policy Red Line

The 10-year U.S. bond yield is the most crucial pricing indicator in the entire U.S. financial system, affecting mortgage rates, corporate bond rates, and other consumer and corporate financing costs, which are mostly calculated based on this yield.

Once the yield approaches 5%, financing costs will rise significantly, leading to a slowdown in economic activity. Therefore, both Yellen and Bessent are particularly sensitive to this threshold; as soon as the yield nears this level, they will actively intervene.

From Yellen's Short-Term Bond Strategy to Bessent's Long Bond Buybacks

Hayes explains that bonds can be categorized by maturity into short-term Treasury bills (T-bills, maturing within a year) and long-term bonds (maturing in over twenty years). Short-term Treasury bills are highly liquid and are preferred assets for money market funds (MMFs).

By the end of 2023, Yellen significantly increased the issuance of short-term Treasury bills, prompting funds that were previously parked in the Federal Reserve's overnight reverse repurchase mechanism (RRP) and could not be utilized by the banking system to flow into Treasury bills that could be re-lent. This operation was later termed "Activist Treasury Issuance" (ATI) in academic circles.

At that time, the RRP scale dropped from $2.5 trillion to $100 billion, equivalent to releasing $2.4 trillion in liquidity, which drove the Nasdaq index and Bitcoin to rise simultaneously.

Now, Bessent faces a similar situation. Due to excessive issuance of short-term Treasury bills accelerating the debt accumulation rate, he has chosen to use the Federal Reserve's Reserve Management Program (RMP) to continue buying Treasury bills while utilizing the Treasury's long bond buyback mechanism to repurchase longer-term bonds with the proceeds from bond issuance, thereby lowering long-end yields.

On August 19, Bessent announced an increase of $20 billion in the long bond buyback scale for the next fiscal quarter. Following the announcement, the 10-year yield briefly fell, and Bitcoin rebounded accordingly.

However, Hayes points out that given the total U.S. debt stands at $40 trillion, such an increase is still insufficient, and the yield subsequently returned to pre-announcement levels.

How Much Longer Can Bitcoin Rise?

Hayes believes that Bessent has several potential paths ahead:

1. Imitate the Bank of Japan's yield curve control model, announcing unlimited buybacks whenever the 10-year yield exceeds 5%.
2. Continue a gradual increase in buybacks while utilizing other Treasury tools to create liquidity.
3. Utilize the current approximately $1 trillion in the Treasury General Account (TGA) to support buybacks.

However, regardless of the approach taken, he expects that the funds will ultimately flow into risk assets.

Hayes emphasizes that this liquidity easing cycle has just begun, and during this process, prices may not rise steadily, and volatility will likely increase. Therefore, unless one is a professional trader, he does not recommend using leverage.

He reveals that his fund, Maelstrom, has currently maximized its risk positions, primarily holding Bitcoin ($BTC), Ethereum ($ETH), Ethena ($ENA), and Ether.fi ($ETHFI) among other assets, preparing for the next bull market.