Chart of the Week: Bond Market Could Be Bitcoin's 'Canary in the Coal Mine'
Widening credit spreads may indicate further problems with risk pricing.
James Van Straten | Edited by Aoyon Ashraf April 6, 2025, 1:00 PM
What is important to know:
- Credit spreads reached their highest levels since August 2024, coinciding with key market events.
- The IEI/HYG ratio, a gauge of credit spreads, is showing its biggest rise since the Silicon Valley meltdown in March 2023.
- Historically, Bitcoin and other risk assets tend to decline during times of sharp widening of credit spreads.
- However, Bitcoin may begin to separate itself from traditional markets and potentially become a safe haven for investors.
Credit spreads continue to widen and have reached their highest since August 2024, a time when Bitcoin (BTC) fell 33% as speculative trading in the yen unwound.
One way to track this is by using the ratio between the iShares 3-7 Year Treasury Bond ETF (IEI) and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). This IEI/HYG ratio, noted by analyst Caleb Franzen, serves as a proxy for credit spreads and is currently on track for its sharpest jump since the Silicon Valley Bank crisis in March 2023 — when Bitcoin hit a local low just below $20,000.
Historically, Bitcoin and other risk assets have tended to decline during times of sharp widening of credit spreads.
The big question now is whether this rally has peaked or whether more declines are ahead. If spreads continue to widen, it could signal growing tensions in financial markets and foreshadow further challenges for risky investments.
The credit spread is the difference in yield between safe government bonds and riskier corporate bonds. When spreads widen, it signals growing risk aversion and tightening financial conditions.
However, Friday's market action seems to indicate that Bitcoin is beginning to separate itself from traditional markets, outperforming stocks. One analyst described it as a new “hedge against U.S. lockdown,” emphasizing that BTC could begin to act as a safe haven or digital gold for TradFi investors.
Read more: Cryptocurrency Outperforms Nasdaq as BTC Becomes 'US Lockdown Insurance' Amid $5T Stocks
