The bond market is reasserting dominance over risk assets, including cryptocurrencies. Bond yields serve as a key fear gauge for the financial system. They reflect investor expectations for inflation, growth and central bank policy, directly influencing borrowing costs and valuations across traditional finance and digital assets.
James Carville, a political adviser to former President Bill Clinton, once said that if there was reincarnation, he would like to come back as the bond market. "You can intimidate everybody," he remarked.
In the week ending 23 May, the benchmark 10-year US Treasury yield reached 4.631%, its highest level since February 2025. The two-year yield – highly sensitive to near-term inflation and interest rate expectations – climbed to 4.102%. In Japan, the 10-year government bond yield hit 2.8%, the highest since 1996. UK 10-year gilt yields reached 5.187%, the highest since the financial crisis of 2008.
These moves triggered immediate selling in crypto and equities. Bitcoin (BTC), the largest cryptocurrency by market capitalization and widely viewed as a digital store of value, dropped below $77,000 after touching $82,800 earlier, and by 3 Jun had dipped as low as $65,379.
Drivers of higher yields
Sovereign bond yields remained at historically low levels for years after the financial crisis. Central banks lowered benchmark interest rates to the effective zero lower bound and deployed quantitative easing (QE) – large-scale asset purchases designed to stimulate economies.
The pandemic marked a turning point. Massive fiscal stimulus packages and the energy crisis that followed Russia's 2022 invasion of Ukraine drove inflation sharply higher. Central banks responded by raising interest rates aggressively.
The neutral interest rate – known as r-star, the level at which investment equals savings and the economy operates at full capacity – has risen. According to the Lubik-Matthes model from the Richmond Fed, the median estimate reached 1.68% in the fourth quarter of 2025, up from post-pandemic lows near 0.5%. Central banks must now maintain higher policy rates to keep inflation at target levels amid repeated supply-side shocks from pandemics, conflicts and tariffs. The era of ultra-low rates and yields has ended. Higher for longer has become higher indefinitely.
Large government deficits have added to the pressure. Many countries carry historically high debt loads. The US federal deficit stands near 6% of gross domestic product amid policy uncertainty.
Geopolitical risks fuel inflation fears
Escalation in the Middle East has pushed energy prices higher, feeding into inflation readings and short-term expectations. With no clear end to the conflict, markets are pricing in risks of further rate hikes. Potential further disruption to the Strait of Hormuz – a critical choke point for about one-fifth of global oil shipments – could cause sharp swings in energy prices depending on whether the route stays open or is blocked.
Investor shifts amplify moves
Quantitative tightening (QT) has reshaped bond ownership. Central banks have reduced their holdings of government debt. According to the OECD's Global Debt Report 2025, the share of government debt held by central banks in member countries fell from 29% in 2021 to 19% in 2024. Euro area and UK central banks have continued QT, lowering the share further.
Meanwhile, households and foreign investors have increased their shares to 11% and 34%, respectively. These groups tend to be more price-sensitive than central banks. Hedge funds have also grown more active in the US Treasury repo market. This shift has contributed to upward pressure on specific segments of the yield curve.
Crypto suffers as yields rise
Higher sovereign yields signal expectations of elevated future interest rates and persistent inflation. They raise borrowing costs, increasing default risks for households, governments and corporations while pressuring valuations of non-yielding assets.
For cryptocurrencies, this dynamic has proven particularly challenging. Bitcoin (BTC) and the broader digital asset market have recently traded more like high-beta growth equities than as an uncorrelated store of value. The 30-day correlation between Bitcoin and the S&P 500 reached 0.74 in early 2026, showing tight alignment during macro shocks.
Spot Bitcoin ETFs recorded net outflows exceeding $1.5bn in recent weeks, reflecting reduced institutional appetite amid rising yields. Previous Sandmark analysis showed crypto moving in tandem with technology stocks, rather than decoupling. In policy shocks, Bitcoin often acts as a leveraged US macro asset, mirroring the Nasdaq with higher volatility.
Markets will watch upcoming inflation data and central bank responses closely. Outcomes around oil supply and energy prices could determine whether yields stabilize or push higher, with direct implications for Bitcoin and crypto valuations.
