🥛 We just got a cheat code 🎮

GM. This is Milk Road, the crypto newsletter that works like a GPS for the market. We do the recalculating so you don't have to.

Here’s what we’ve got for you today:

✍️ Bonds just got a cheat code.
🎙️ The Milk Road Show: The Altcoins Best Positioned to Win This Bull Market.
🍪 Ethena partners with Binance for equity perps basis trades.

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BONDS JUST GOT A CHEAT CODE 🎮

All week we've been asking which market has it wrong: oil, Bitcoin, or bonds. Fidelity's Jurrien Timmer just made the case that bonds are now the hardest one to be wrong about.

The 10Y Treasury yield closed at ~5.18% on Thursday, the highest it's been since July 2007, back when the iPhone was one week old.

Source: FRED

That's bad news if you already own bonds, because when yields go up, the price of the bonds you're holding goes down.

But if you're thinking about buying some, Timmer (Fidelity's director of global macro) says it's turned into one of the best setups in almost 30 years.

Source: @TimmerFidelity

Yeah, I know - that looks like a science fair project, so here's the tl;dr:

Say you buy 7Y-10Y Treasuries today… If yields fall by 1% over the next year, you make about 11.9%, while if they rise by 1% you only lose about 1.9%.

(aka: the risk is asymmetric.)

A bond pays you in two ways: the interest it pays and the change in its price. The price part works like a seesaw - for a bond like this, every 1% move in yields pushes the price about 7% in the opposite direction.

The interest is the part that has changed. At 5% a year, you collect roughly 5% no matter which way the seesaw tips, meaning:

Yields fall 1% → price up ~7%, plus ~5% interest = ~+12%.
Yields rise 1% → price down ~7%, plus ~5% interest = ~-2%.

Now, rewind to August 2020, when the 10Y yield was about 0.5%. Same seesaw, almost zero interest to soften the landing:

Source: Fidelity

The 5% interest rate works like an airbag, and in 2020 bond buyers were driving without one.

So the whole trade comes down to one question: does the 10Y yield fall from here?

Most people assume the Fed decides that, since it's the one that's been pushing rates up. When it flips from hiking to cutting, the 10Y should follow it down, right?

Well, the last time the Fed flipped, the 10Y did something very awkward…

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BONDS JUST GOT A CHEAT CODE (P2) 🎮

In September 2024, the Fed started cutting. By December, it had cut rates by a full 1%, from 5.33% to 4.33%.

The 10Y yield went up. It was 3.63% two days before the first cut and 4.79% by mid-January, so anyone who bought 10Y bonds expecting a Fed rate cut to lift bond prices took a loss as the Fed cut rates.

Source: FRED

That happened because the 10Y yield has a piece the Fed doesn't control.

Economists call it the "term premium," the extra interest lenders demand for tying their money up for 10 years instead of rolling it over every few months, and it rises when lenders get nervous about inflation surprises, deficits, or simply who's going to buy all this debt.

The Fed's own estimate of it (the Kim-Wright model) jumped from ~0.04% to ~0.81% during that stretch of cuts, which covers most of the 10Y's rise.

Here's where that same measure sits today:

Source: FRED

Yesterday we asked who's going to keep buying all this debt at the old price, and pointed out that the buyers at last week's 20Y auction wanted a bigger premium.

The premium sits at ~0.96%, the highest since 2011, and it's been climbing all year from 0.58% in January.

To be fair to the Fed, it's done most of the pushing lately.

It hiked on September 16 for the first time since 2023. Traders put the odds of another hike at the October 27-28 meeting above ~70% (CME FedWatch), and over the past month the 2Y yield, which tracks the Fed closely, rose ~0.63% while the 10Y rose ~0.48%.

Inflation fear isn't what's driving it. The bond market's 10Y inflation forecast sits at 2.33%, right where it's been since June, so the jump is in real yields, driven by the Fed's hikes and a slowly rising term premium.

So what would actually bring the 10Y down? A peace deal that sinks oil could take back some of this month's rise (the 10Y is up ~0.5% since late August) by talking traders out of those extra hikes.

A full 1% drop probably needs one of two bigger things:

The economy cracks, the Fed cuts hard, and everyone runs to bonds for safety.
Washington leans on the long end directly

Road one looks a long way off right now.

As John flagged on Tuesday, the Atlanta Fed's GDP tracker has the economy growing at ~5.1% this quarter, and Thursday's jobless claims came in at ~197K, the lowest since July.

And Road two leads us to Japan…

Japan is the largest foreign holder of U.S. Treasuries, and when the yen weakens too much, Tokyo defends it by selling dollars, which usually means selling Treasuries. On Thursday, the yen slid back to 159/$, the level at which Japan intervened once before.

Source: TradingView

When the yen blew through ~160 and hit ~164 in July, the U.S. Treasury joined in, selling euros from its own reserve fund to buy yen, reportedly so Japan wouldn't have to dump Treasuries into an already shaky bond market.

The Financial Times asked whether that was about helping an ally or about U.S. interest rates, and Treasury Secretary Bessent's message to currency traders this month was "I am the house now."

And those two roads end in very different places for crypto.

On road one, Bitcoin has usually been sold off alongside stocks when growth scares hit, so bonds would win and BTC would likely take the first hit. On road two, the government is keeping its borrowing costs down by leaning on the money supply, which is the long-run case for Bitcoin (and for gold).

For now, both are holding up well, even though a risk-free ~5% is the toughest competition either has faced since 2007.

Gold sits at ~$4,330 an ounce, and Thursday's line in the sand for Bitcoin remains the May high at ~$82.8K. It's still above that at ~$84.6K.

So yes, Timmer's math checks out, and 5% is a real cushion.

But the payoff needs the 10Y to fall, and 2024 showed that a Fed rate cut on its own doesn't guarantee that.

If yields do fall, the reason for the decline will determine whether bonds or Bitcoin had the better year.