Bessent's bond buyback sparks debasement trade, lifts gold and bitcoin

Treasury Secretary Scott Bessent doubled the maximum size of the department's bond buybacks to at least $4 billion last week, a move that traders and analysts said revived the debasement trade. Gold touched three-month highs Monday, building on a weekly advance of more than 5%. Bitcoin (BTC) added 2% Monday to the highest since May and touched $80,000 overnight Tuesday. The U.S. dollar index hit three-month lows last week and recorded its third down week in the last four.

The signaling effect of the buyback increase was powerful even though the size is trivial relative to the overall bond market, said Stephen Coltman, head of macro at 21Shares. The announcement followed news that the monthly U.S. budget deficit in July reached a five-year high and total federal government debt topped $40 trillion. Long-dated Treasury yields surged last week, with the 30-year yield touching a near 20-year high of 5.34% before dipping and rebounding.

Investors are piling into gold and bitcoin as hedges against a weaker dollar and rising debt. Ray Dalio, the Bridgewater Associates founder, recommended investors remain overweight gold and bitcoin, warning that the government's financial condition is at an inflection point. Deutsche Bank analyst Michael Hsueh said in a note that gold could surpass his target price of $4,800 an ounce, calling the Treasury policy change a signal that reinforces the constructive view.

A Federal Reserve rate hike could stem the debasement trade. Fed funds futures reflect about a 56% chance the central bank raises borrowing costs at its October meeting, up more than seven percentage points from a week ago, according to CME's FedWatch tool. Nohshad Shah, Citadel's head of fixed income sales for Europe, the Middle East and Africa, said the bond market's message is straightforward: fiscal or monetary policy should be tighter.

Further deficit expansion and inadequate Treasury action could deepen the trade. Geopolitical escalation adds to the risk. The U.S. on Monday rolled out a global sanctions program focused on segregating Iran from the global economy, days after slapping 50% tariffs on billions of dollars in Canadian exports. Coltman at 21Shares said growing geopolitical tension adds to the demand for alternative stores of value.

John Arnold, the billionaire philanthropist and former energy trader, said in a Friday post on X that the weaker dollar and lower Treasury prices are part of the debasement trade, with hard assets strengthening. Shah at Citadel said a weaker dollar can ease financial conditions and worsen inflation. The Fed might need to hike in response, he said.

Alexander Lis, investing chief at Social Discovery Ventures, said it's probably too early to endorse the debasement trade unless it's clear that the Fed will go along with the Treasury Department.

CME Group, which lists gold and bitcoin futures, carries an AlphaScala score of 62 out of 100, labeled Moderate, in the Financials sector.

The dollar index was little changed on Monday, with investors showing little interest in bidding up the greenback. The 30-year yield dipped and rebounded after the buyback move, a signal that bond investors saw Bessent's moves as inadequate, traders said.