The week through July 5 brought bitcoin a gain of nearly 7% — its best result since March. The reason is not in crypto itself, but in the bond market: for the first time since 2024, inflation expectations have fallen below the target set by the Federal Reserve.
A Signal From the Debt Market
There is an indicator that traders use to assess future inflation — the difference in yield between regular US government bonds and inflation-protected bonds. It is called the breakeven spread. The two-year version of this indicator has fallen below 2% — exactly the pace of price growth the Fed considers acceptable. A similar dynamic is seen for longer terms, meaning the movement is not local but systemic.
There is another coincidence. The spread on two-year bonds moved almost in sync with prices for WTI crude oil, which directly shapes the overall level of inflation. Both values have returned to where they were before the outbreak of war in the Strait of Hormuz in late February. This means the market is now erasing all the extra premium for geopolitical risk accumulated in recent months.
For traders, this changes the calculation on several fronts at once. If bonds are pricing in inflation below the Fed’s target within two years, the argument for new rate hikes weakens by itself. And with it, the barrier to bitcoin growth also weakens: the digital asset has historically moved inversely to the strength of the dollar. When rate expectations ease, the dollar loses appeal for conservative portfolios, and some capital flows into risk assets like cryptocurrencies.
Too Many Bets in One Direction
A senior fellow at the Brookings Institution, who previously worked as chief economist at the Institute of International Finance, warns of a characteristic feature of the current market — almost all players have bet on the same outcome. Such homogeneity of positioning makes the market fragile: any deviation from expectations will trigger a sharp and painful correction.
In his view, the stress test will come on July 14, when the June consumer price index is released. Cheaper oil should remind everyone that the regulator does not intend to tighten policy — if events unfold, it is more likely to prepare for a rate cut than a hike.
If the foundation under the current strength of the dollar proves shaky, the reaction to the data release will be disproportionately sharp. With such crowded positioning, even a small deviation of actual figures from the forecast provokes mass position closures — market participants rush in one direction almost simultaneously, amplifying price swings.
Skeptics See a Different Picture
Not everyone shares this optimism. Some analysts believe the market gives too much weight to oil prices in the overall inflation picture. In their view, the increased pressure on prices is no longer a result of the military conflict, but a structural feature of the economy that will persist even after the situation around the strait normalizes.
The YCC Macro analytical group stated directly on social network X: a drop in gasoline prices alone does not give the regulator the right to declare victory over inflation. Persistent price growth in the services sector is exactly the reason why the central bank will keep rates high longer than usual, even if the overall CPI continues to slow month to month.
In their view, market participants betting on a sharp easing of monetary policy underestimate how resilient core inflation will be once the energy component stops masking it. Housing rents, medical services, and education respond to rate changes much more slowly than fuel prices — that is why their dynamics are more important for the long-term forecast than one-off fluctuations in the energy market.
Where the War Premium in Prices Came From
It is worth recalling the context: the surge in inflation expectations at the start of the year was directly linked to the escalation of the conflict around the Strait of Hormuz — a key transport artery for global oil supplies. Fear of shipping disruptions pushed oil higher, and inflation expectations in the bond market rose in turn.
Since then, the situation around the strait has calmed: tanker movement has resumed, OPEC+ announced increased production starting in August. Oil has returned to pre-crisis prices, and the bond market has responded in sync. The open question remains: was the rise in inflation expectations entirely due to the war premium, or did the conflict simply accelerate the manifestation of already existing price pressures in the economy.
Two Weeks Until the Outcome
The situation is hanging between two possible trajectories. If the June CPI report on July 14 confirms a slowdown in price growth, the breakeven spread will continue to fall, the dollar will lose ground, and bitcoin will get extra fuel for growth — this is the sequence of events envisioned by the deflationary scenario supporter from the Brookings Institution.
If, however, the numbers show persistent core inflation in services, as YCC Macro warns, the market will have to sharply revise bets on Fed easing. This will create pressure in the opposite direction — for both the dollar and risk assets, including bitcoin, which has already priced in the positive scenario in advance.
Right now, the scales are clearly tipped toward the first option — a two-year breakeven below 2% for the first time since 2024 is a strong signal in itself. But it is precisely the crowdedness of this bet, according to skeptics, that makes the market vulnerable to disappointment if the CPI data delivers an unpleasant surprise. Those trading on this expectation should keep a simple rule in mind: the more unanimous the market is in its bet, the more painful the correction will be if it does not materialize.
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