The widening of credit spreads has accelerated, reaching levels not seen since August 2024 — a timeframe that correlated with a 33% drop in bitcoin (BTC) during the unwind of the yen carry trade.
To monitor this trend, one can observe the ratio of the iShares 3-7 Year Treasury Bond ETF (IEI) to the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). This ratio, pointed out by an analyst, acts as a gauge for credit spreads, currently showing a significant increase reminiscent of the peak observed during the Silicon Valley Bank crisis in March 2023 — a point when bitcoin reached a local low just under $20,000.
Traditionally, bitcoin and similar high-risk assets tend to experience declines during substantial expansions in credit spreads.
The pressing question now is whether this current increase has reached its limit, or if further declines are forthcoming. A continuous rise in spreads could indicate increasing stress within financial markets, potentially creating additional challenges for risk-on strategies.
A credit spread reflects the difference in yields between secure government bonds and more speculative corporate bonds. As spreads widen, it signals a rise in risk aversion and a constriction in financial conditions.
Yet, the market movements observed last Friday hint that bitcoin may begin to disconnect from traditional markets, outperforming equities. One analyst characterized it as the new “U.S. isolation hedge,” suggesting that BTC might be evolving into a safe haven or digital gold for traditional finance investors.
Read more: Crypto Outperforms Nasdaq as BTC Becomes ‘U.S. Isolation Hedge’ Amid $5T Equities Carnage