Key points:

• Bond yields have been rising since the beginning of the Iran war, and the move has widely been attributed to inflation expectations linked to higher energy prices.
• However, the five-year inflation expectation priced into Treasury Inflation-Protected Securities is 2.2% and has been trending lower since May.
• The main driver appears to be rising real yields, which is bearish for non-yielding assets such as Bitcoin.

Continuation of Q2 bond selling

After yields reached local lows in early March, US government debt has been in a multi-month sell-off. This week, following the most recent meeting of the Federal Open Market Committee (FOMC), 30-year Treasury yields made headlines after reaching their highest level since 2007.

In line with the two-year yield rising 76 basis points (bps) over this period, markets are pricing in a 63% probability of a September rate hike by the Federal Reserve, according to CME FedWatch.

2Y, 10Y and 30Y US Treasury yields. Data source: Treasury.gov

At these elevated rates, government bond investments are, for the first time since 2019, more profitable than cash-and-carry trades in the crypto markets, according to Glassnode’s latest research. That makes the direction of Treasury yields relevant beyond traditional fixed income, because higher risk-free returns can affect capital allocation across markets.

2Y US Treasury yield and crypto futures carry trade. Source: Glassnode

The mainstream inflation narrative

The bond sell-off is commonly attributed to inflationary pressure from higher commodity and energy prices. The multi-month decline in bonds has coincided with the start of the Iran war and the resulting closure of the Strait of Hormuz. In addition, the daily closes of the two-year US government bond yield, West Texas Intermediate (WTI), and Brent crude have correlated since March at a coefficient of r=0.44.

Daily closes of WTI and Brent crude against the 2Y yield. Data sources: fred.stlouisfed.org, EIA

WTI briefly moved back above $85 a barrel on Thursday after President Donald Trump threatened Iran, and bonds sold off ahead of the FOMC meeting. With no near-term resolution apparent in the conflict, some market participants have argued that higher rates are being driven by inflation expectations.

WTI (West Texas Intermediate) oil price chart. Source: Tradingeconomics.com

That view has also fueled inflation concerns in the mainstream financial press, with recent Bloomberg headlines including: “Global Bonds Are Reeling as Oil Surge Rekindles Inflation Threat,” “US Yields Hit Two-Month High as Oil Sparks Inflation Risk,” and “Global Bond Selloff Worsens as Rising Oil Prices Spook Investors.” Among crypto and precious metals audiences, the narrative has also gained traction, including on social media, where market commentator and Bitcoin influencer The Wolf of All Streets recently posted on X:

However, the trading of other Treasury securities does not support the view that inflation is the main driver of higher yields.

TIPS point to real rate increases

While most analysts focus on nominal Treasury yields, Treasury Inflation-Protected Securities, or TIPS, offer evidence against the inflation narrative.

A Treasury Inflation-Protected Security is a standard Treasury bond whose principal is adjusted upward in line with the Consumer Price Index for All Urban Consumers (CPI-U). In addition to the inflation-protected principal, each TIPS pays a fixed coupon rate. As a result, both principal and interest payments are adjusted for inflation, unlike a regular bond.

By comparing the yield on a TIPS with that of a regular Treasury of the same maturity, traders can estimate expected future CPI inflation using the so-called breakeven rate. Although Treasury yields have been rising, the five-year breakeven rate has fallen sharply since May.

Five-year breakeven inflation rate. Source: fred.stlouisfed.org

At roughly 2.2%, the five-year breakeven implies that the Federal Reserve is expected to reach its 2% target in the medium term. More importantly, the breakeven rate has moved in the opposite direction from nominal Treasury yields, suggesting that investors are not simply pricing in a broader inflation reset across the curve.

While the five-year nominal yield rose 33 bps, TIPS data suggests the move was driven by an 84 bps increase in the real yield, partly offset by a 51 bps decline in expected inflation. Although the inflation narrative remains a compelling story, the market appears to point to rising real yields as the more accurate explanation.

What it may mean for crypto

In general, higher real returns on bonds and stocks, measured against CPI, make non-yielding assets such as Bitcoin relatively less attractive to some investors. Beyond that, the effect on crypto depends on why real rates are rising, and several explanations are possible.

Reserve liquidation — No clear impact on crypto. Higher oil prices widen trade deficits for Asian energy importers. Because oil is generally priced and settled in US dollars, shortages have emerged in local eurodollar markets in Asia, pressuring exchange rates. The Japanese yen (JPY), Philippine peso (PHP), and Indian rupee (RBI) have all required central bank intervention to defend their currencies. Since those measures are funded by the sale of US Treasury reserves, they can put upward pressure on bond yields. HSBC’s Frederic Neumann has said the bond sell-off is better explained by foreign-exchange pressure than by a verdict on the dollar.

Demand destruction — Bearish for crypto. If an oil shock lasts long enough, it stops being merely inflationary and begins to trigger recession risk. Neuberger Berman argued in its second-quarter outlook that investors are underpricing the hit to output from sustained energy prices. A credit contraction accompanying recession would be negative for equities and Bitcoin because it would sharply restrict liquidity. In a sign of possible recessionary credit stress, credit spreads are expected to widen. Cointelegraph reported possible early signs of this on Wednesday.

Related: Cost to insure AI debt reaches record high amid Asian semiconductor tumble

Investment demand — Likely bearish for crypto. Real rates may also be responding to expected growth and the demand for capital from the AI sector. Government bond issuance is increasingly competing with record corporate bond issuance from AI hyperscalers. Goldman Sachs Research projects about $755 billion of AI capex in 2026 and about $920 billion in 2027. UBS has raised its 2026 investment-grade issuance forecast to $1.8 trillion, with technology supply lifted to $360 billion based on hyperscaler guidance. Because crypto competes for a similar pool of capital and investor attention, this is likely to weigh on the sector.