Arthur Hayes, CEO of Flop Labs and CIO of Maelstrom, linked U.S. Treasury Secretary Scott Bessent’s decisions to an approach used by former Treasury Secretary Janet Yellen. In his new essay, he said the Treasury is using tools that can both keep the 10-year Treasury yield around 5% and increase dollar liquidity. In the analyst’s view, this policy could lead to a strong rise in bitcoin from current levels.
The Treasury Is Repeating the 2023 Playbook
On August 19, Bessent announced an increase in the volume of long-term Treasury buybacks. Hayes saw this as a signal that the Treasury is prepared to expand measures similar to those used by Yellen in late 2023.
At the time, the Treasury increased the issuance of short-term Treasury bills relative to longer-term bonds. This led to an outflow of funds from the Federal Reserve’s reverse repo program (RRP), with the RRP balance falling from $2.5 T to around $100 B by January 2025.
As a result, around $2.4 T of liquidity entered the market. During the same period, the yield on 10-year Treasury bonds pulled back from the 5% level, while the federal funds rate remained around 5.3%. Bitcoin and the Nasdaq 100 also rose.
How the Liquidity Mechanism Works
According to Hayes, the key factor is the way money market funds reallocate their funds. When the yield on Treasury bills is higher than the rate on the Fed’s reverse repo operations, funds move from the RRP into T-bills.
Those funds then flow into the banking system, increasing available liquidity. The Treasury can also use long-term bond buybacks and funds from its Treasury General Account (TGA), whose balance is around $1 T.
The analyst also points to actions by the Federal Reserve, which purchases short-term Treasury bills through its reserve-management program, supporting the flow of liquidity through this mechanism.
Bitcoin’s Potential Upside
According to Hayes, bitcoin reacts to changes in global liquidity faster than other assets. He noted that after Yellen announced a change in the Treasury’s issuance mix, bitcoin began rising from local lows.
Now, the investor expects a similar move following Bessent’s actions. He said he is holding the largest bitcoin position he has ever taken and expects volatility to increase, with short-term pullbacks along the way as part of the broader uptrend.