Markets Edition: Hawkish Central Banks, USDJPY and the Return of Bitcoin

Summary

Recorded September 21, 2026, the episode reviews hawkish central-bank surprises and their implications for rates and equities, the Bank of Japan’s dovish tilt, and Bitcoin’s rally.

Rates and central-bank outlook

• The Fed raised rates by 25 basis points. Its median federal-funds projection was lifted to 4.1% at year-end 2026 and remained at that level for 2027.
• Citi Economics’ base case is one hike and done. Under that view, existing payer positions may be mature, and investors could soon consider switching to receivers. The speakers stressed, however, that the size and timing of the cycle remain uncertain.
• A more hawkish scenario is that the Fed reverses some of its prior cuts because the labor market did not weaken as expected, leading to two or three additional hikes—roughly what markets were pricing at the time.
• A still more hawkish risk is that an AI-driven boom broadens into stronger employment and wage growth, forcing a larger hiking cycle. The speakers cited 175 basis points of Fed hikes in 1999–2000 as a historical comparison.

The speakers outlined this general framework for hiking cycles:

• Pay rates for roughly six months after the first hike.
• Stay paid until only about one hike remains, then consider receiving.
• Concentrate payer exposure at the front end, where curves often bear-flatten.
• Treat this as a framework, not a precise timing rule; the speakers noted that the timing and eventual extent of a cycle are difficult to know in advance.

Given the risk of a larger cycle, the speakers remained cautious on both the front end and long-duration rates. They argued that 30-year yields may not have peaked if the hiking cycle expands, and that growth-driven pressure could push long yields higher alongside short yields. They also noted that higher oil prices could make it harder for long-end yields to hold around the cited “5.30” level.

Equities and market risks

Historically, equity-market jitters around the first Fed hike have tended to be short-lived. In the median case, equities bottom about six weeks to two months after the first hike, then recover.

The upcoming U.S. midterm-election period was identified as a potential source of higher implied volatility. The MOVE Index had not moved substantially around the initial hike.

The speakers cautioned against treating any single yield level as a reliable threshold that “breaks” equities. They said yield composition and the pace of change matter more:

• The recent rise was driven more by real yields than by swap spreads or breakevens.
• The term premium had been relatively well-behaved and had declined, alongside some curve flattening.

AI-related regulation was also flagged as a risk. The speakers said that, at the time, policy discussion appeared more focused on shaping regulation than restricting compute demand. However, a broader incident—or post-election developments—could lead to stricter rules.

Japan, the yen, and JGBs

The BOJ meeting was viewed as dovish relative to expectations: two government-appointed dovish members voted to hold. The FX market reacted more than the rates market, and USD/JPY moved higher.

A more hawkish Fed made it less likely that the BOJ would out-hawk the Fed, prompting some reduction in long-yen positions. The speakers nevertheless cautioned that the yen’s bullish case also rests on potential GPIF repatriation flows, not just BOJ policy.

The GPIF, described as the world’s largest pension fund, manages more than ¥300 trillion. A possible 10-percentage-point increase in local-bond holdings—about ¥30 trillion—could be funded by reducing foreign-bond holdings, creating a potentially significant tailwind for both the yen and Japanese government bonds (JGBs).

The speakers said this prospect was one reason Citi had reduced its longstanding JGB underweight. They noted that the effect could be especially meaningful for JGBs because of their lower market liquidity.

As historical context, in 2014 the GPIF reduced its domestic-bond allocation from 60% to 35% and bought foreign equities, a shift associated in the discussion with substantial yen depreciation.

Bitcoin and crypto

Bitcoin rallied despite the hawkish Fed and the Clarity Act’s failure to secure enough Senate votes for cloture.

The speakers revisited the “debasement trade,” including Treasury buybacks, which they said had supported gold and Bitcoin. They said the recent move provided some evidence that crypto-market regulatory developments were also helping sentiment.

They expected the SEC to continue rulemaking around crypto markets. They characterized crypto as highly reflexive and sentiment-driven, and noted that Bitcoin was trading above its 200-day moving average and other moving averages.

The speakers said trend-following approaches can work particularly well in crypto. They also cited a cross-market signal: when Bitcoin trades above its 55-day moving average, Nasdaq returns have typically been higher, reflecting risk appetite and sentiment.

Assets, sectors, and instruments mentioned

• Rates: Federal funds, front-end and long-end rates, 30-year yields, payer and receiver positions, U.S. Treasury buybacks
• Equities and indices: U.S. equities, Nasdaq, MOVE Index
• Foreign exchange and bonds: USD/JPY, yen, Japanese government bonds (JGBs), foreign bonds
• Other assets: Bitcoin, gold, oil
• Sectors and themes: AI, crypto markets, compute demand
• Institutions and policy: Federal Reserve, ECB, Bank of England (BOE), Bank of Japan (BOJ), GPIF, SEC, Clarity Act

Disclosures

Citi stated that the podcast is thematic and for information only—not investment research or financial, economic, legal, tax, or accounting advice, and not an offer or solicitation to buy or sell financial instruments. Citi said the content is not tailored to individual circumstances, accuracy and completeness are not guaranteed, and past performance does not guarantee future results.

Presenters and sources

The presenters were Dirk Willer, host and Citi global head of macro, and Alex Saunders, Citi head of quant macro. The discussion also referred to Citi Economics, Citi’s market research and studies, and GPIF-related allocation flows.

Scott Chronert was mentioned as the host of the following week’s episode, not as a presenter in this one.