Why gold and bitcoin are rising as investors question US debt, bond yields and the dollar

The "debasement trade" has become one of the market's favourite phrases again. It sounds ominous, but the idea behind it is fairly straightforward. Investors are asking whether heavily indebted governments will ultimately tolerate a weaker currency and somewhat higher inflation rather than accept the economic and political pain required to bring their finances decisively under control.

This is not a prediction that the dollar is about to collapse, nor does it mean governments are simply turning on the printing presses. It is better understood as a form of insurance against the possibility that policymakers eventually choose the easier monetary path over the harder fiscal one.

Why the Debasement Trade Has Returned

The United States is at the centre of the debate. Gross federal debt has now passed $40 trillion, including roughly $32.3 trillion held by the public. Meanwhile, the Congressional Budget Office projects a fiscal deficit of $1.9 trillion, or 5.8% of GDP, in 2026, with debt held by the public reaching 101% of GDP. Net interest costs alone are expected to absorb around 3.3% of GDP.

Those numbers matter because investors are already demanding more compensation to lend money to the government for long periods. The 30-year Treasury yield reached 5.337% on 18 August, its highest since 2007, amid concerns about inflation, large fiscal deficits, heavy government borrowing and geopolitical uncertainty.

Then came the surprise. On 19 August, the Treasury announced that it would at least double the size of its liquidity-support buybacks in the 10-to-20 and 20-to-30-year sectors, raising the maximum from $2 billion to at least $4 billion per operation from 9 September through 4 November. Treasury says the purpose is straightforward: improve liquidity in parts of the market where trading can become fragmented.

That distinction is important. This is not quantitative easing. The Federal Reserve is not creating reserves to purchase bonds as part of monetary policy. Nevertheless, the move has unsettled some investors because it came immediately after a sharp rise in long-term yields. Treasury Secretary Scott Bessent has also said the purchases could be increased further.

The concern is therefore less about what Treasury is doing today and more about where the policy could eventually lead. If Washington becomes increasingly reluctant to allow long-term yields to reflect fiscal pressures fully, investors may conclude that some of the adjustment will instead have to occur through the currency. That is the heart of the current debasement argument.

Where the Trade Is Showing Up

Gold is the clearest beneficiary. Spot gold is up roughly 14% in August, trading around $4,620 an ounce after recently reaching a three-month high. Gold also enjoys a structural source of demand from central banks, which bought a net 289 tonnes in the second quarter, 62% more than a year earlier. That picture deserves some balance, however: first-half central-bank buying was actually the weakest since 2022 after a subdued first quarter.

Bitcoin is increasingly being treated as the more volatile version of the same trade. It climbed above $80,000 and has gained around 25% during August. Its fixed supply gives it an obvious appeal to investors worried about currency debasement, although this is not purely a macro story. Improving expectations around US cryptocurrency regulation have also contributed significantly to the rally.

The dollar sits on the other side of the equation. It weakened sharply following the Treasury announcement before recovering some ground and is slightly firmer today. What has caught investors' attention is the weakening of the normally positive relationship between US yields and the currency. Higher Treasury yields would ordinarily make dollar assets more attractive, but fiscal concerns are increasingly muddying that relationship.

And then there are long-dated Treasuries themselves. Buybacks may provide temporary support, but they do not remove the underlying fiscal problem. Unless investors become more comfortable with America's debt and deficit trajectory, they may continue demanding a sizeable premium to own 10- and 30-year bonds.

The important point is not to get carried away. This is not yet a dollar crisis or a US sovereign-debt crisis. Treasury markets continue to function, and the dollar remains the world's dominant reserve currency. What has changed is that more investors seem willing to buy some insurance against the possibility that today's debt problems eventually come at the expense of the dollar.

For now, the debasement trade is sending a fairly simple message: markets are not saying the dollar is doomed; they are asking what happens if governments find it easier to manage the symptoms of high debt than cure the underlying problem. Gold, bitcoin, the dollar and long-term bonds are becoming the places where that question is being answered in real time.