Debasement trade returns amid government debt alarm

The debasement trade is gaining new traction on Wall Street as concern over the size and cost of the budget deficit mounts.

The conventional wisdom behind the trade is that perceived hard assets, like cryptocurrencies and precious metals, gain as investors try to hedge against a weaker U.S. dollar and Treasury debt in the face of ballooning government spending. Those fears reached a fever pitch last week before, and after, the Treasury Department’s unusual step of increasing debt buybacks under Secretary Scott Bessent.

“The size of the Treasury purchases announced so far by Bessent are trivial in comparison to the size of the overall market, but the [signaling] effect was very powerful,” said Stephen Coltman, head of macro at 21Shares, a crypto-focused creator of exchange-traded funds.

Gold touched three-month highs Monday, building on last week’s advance of more than 5%. The yellow metal has climbed for five straight weeks and in August is on track for its biggest monthly rise since 1999.

Bitcoin added 2% Monday, to the highest since May. Last week, the digital currency soared 22%, its biggest three-day rally since 2023. Overnight Tuesday, the crypto touched $80,000.

Conversely, investors fled the dollar.

The U.S. dollar index, which tracks the dollar against six other leading currencies, hit three-month lows last week and recorded its third down week in the last four. The index was little changed on Monday as investors expressed little appetite to bid up the greenback.

‘Message’ in markets

The Treasury Department said last week that it would double the maximum size of its bond buyback, to at least $4 billion from $2 billion. Two senior Treasury officials told CNBC Monday that the department could use its General Account to help fund the plans.

Last week’s announcement followed news that the monthly U.S. budget deficit in July reached a five-year high and came at the same time as total federal government debt topped $40 trillion. Bessent told CNBC last week that he wields a “big toolkit” to calm the government bond market amid concerns about the government’s financial health.

Long-dated U.S. Treasury yields surged last week, at one point sending the 30-year yield to almost a 20-year high of 5.34%, up from 4.82% in late June. Yields dipped and then rebounded in the wake of the Treasury buyback move, a signal that bond investors believed Bessent’s moves were inadequate.

“Markets are saying something,” the billionaire philanthropist and former energy trader John Arnold said in a Friday post on X. The weaker dollar, lower Treasury prices and strengthening hard assets, are “all part of the debasement trade,” he wrote.