The Debasement Trade Returns

If you haven’t seen by now, Bitcoin made a violent move today, lurching roughly 6% to above $68K at time of writing, blowing out more than $1 billion of shorts along the way.

Most of crypto moved alongside it (most notably ETH), while gold and silver ripped as well. Meanwhile, long-term Treasury yields fell, the dollar weakened, and stocks barely moved.

All in all, it's behavior that heralds the return of the beloved debasement trade: buying hard assets when investors believe policymakers will ultimately tolerate inflation or currency weakness to keep the economic machine running.

This move didn’t come out of nowhere. The catalyst was an announcement from the Treasury that it will at least double how much it can buy back in each operation for certain 10- to 30-year Treasuries, from $2 billion to at least $4 billion beginning September 9.

Why are they doing this? Officially, Treasury wants to make these longer-dated bonds easier to buy and sell and reduce the risk of turbulence in that part of the market. The broader reason traders care is that long-term yields have remained high as inflation persists, government borrowing grows, and investors demand more compensation to lend the government money for decades. In fact, the 30-year yield hit its highest level since 2007 just yesterday.

That matters because Treasury yields set borrowing costs across much of the economy.

When investors demand a higher return to hold government debt, borrowing becomes more expensive not only for Washington, but also for businesses, homebuyers and major investment projects.

While Treasury’s buybacks won’t solve that problem, the government stepping in at all sends a message to Wall Street. The message reads officials are willing to intervene when stress in the bond market starts becoming uncomfortable, or so the market believes. In other words, they'll smooth it out.

If you’ve been on Twitter today, you may have seen plenty of calls that what transpired was the coveted “QE,” or quantitative easing.

Today was not quantitative easing. Put simply, QE is when the Fed creates new money and uses it to buy bonds, putting more cash into the economy to stimulate growth and generally helping push yields lower along the way.

That did not happen today. The Treasury is buying back some of its own existing bonds while continuing to issue debt elsewhere. No new money is being created through this program.

But what matters is what today’s move could imply about where policy goes next. If bond-market stress worsens, traders now see a greater chance that officials will intervene again, potentially through larger liquidity injections or eventually... QE.

Why would policymakers lean that way? The consensus theory revolves around two dynamics: the AI race and Japan.

Start with AI (which Felix at Blockworks has been doing a great job covering). The U.S. government explicitly treats AI leadership as a matter of economic competitiveness and national security, and the infrastructure race is extraordinarily capital intensive. The Treasury estimates that AI-driven investment accounted for roughly half of U.S. GDP growth in Q1, while total real GDP grew 2.1%.

Higher rates make that buildout more expensive, giving policymakers another reason to prevent borrowing costs from spiraling higher and choking off investment. They don't want that.

Then there's Japan.

Japan is the largest foreign holder of U.S. Treasuries, with roughly $1.12 trillion as of June, while its own bond market is under pressure and the yen remains volatile.

The problem is fairly straightforward. Rising Japanese yields make it more attractive for Japanese institutions to keep money at home, potentially reducing their appetite for U.S. Treasuries. At the same time, if Japan needs to prop up the yen, one way to do it is to sell dollar assets, including Treasuries, and use those dollars to buy yen.

As Forward Guidance explains, if Japan were forced to sell Treasuries aggressively, bond prices could fall and U.S. yields could shoot higher, making the same borrowing-cost problem America is already wrestling with even worse.

Neither Washington nor Tokyo wants that outcome. So traders expect the two governments to look for ways to stabilize the yen and Japan’s bond market without forcing a disorderly sale of U.S. Treasuries.

The simplest way to think about it is that policymakers face a tradeoff. They can keep fighting inflation at all costs and risk letting high borrowing costs strain markets and economic growth, or they can step in to relieve that pressure and accept some additional risk of inflation or currency weakness. Today’s announcement has traders betting increasingly on the second option.

And if that means more liquidity entering the system down the road, investors have another reason to flee toward assets whose supply cannot simply be expanded, bringing us full circle to the debasement trade.

We’ll get more evidence over the coming months from Treasury, the Fed and Japan about how durable this policy direction really is. The debasement narrative became overheated last year and earlier this year, but the underlying tension has not disappeared: enormous debt loads, sticky inflation, and strong incentives to prevent borrowing costs from rising enough to threaten markets or strategically important investment.

For today, though, enjoy the green. Hopefully you were positioned accordingly.