The "debasement trade" is regaining momentum on Wall Street as investors grow more concerned about the size and cost of the U.S. budget deficit, with gold and bitcoin both climbing following a Treasury Department move to expand debt buybacks under Secretary Scott Bessent.

The trade rests on the premise that hard assets like cryptocurrencies and precious metals gain as investors hedge against a weaker U.S. dollar and Treasury debt amid rising government spending. "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 ETF issuer.

Gold touched three-month highs on Monday, building on last week's gain of more than 5%. The metal has risen for five straight weeks and is on track for its biggest monthly increase since 1999. Bitcoin added 2% on Monday to reach its highest level since May, after soaring 22% last week in its biggest three-day rally since 2023; overnight Tuesday it touched $80,000. The U.S. dollar index, which tracks the dollar against six other major currencies, hit three-month lows last week and posted its third down week in the last four.

Treasury's expanded buyback plan

The Treasury Department said last week it would double the maximum size of its bond buyback to at least $4 billion from $2 billion.
Two senior Treasury officials told CNBC on Monday the department could use its General Account to help fund the plans.
The move followed news that the monthly U.S. budget deficit in July reached a five-year high, coinciding with total federal government debt topping $40 trillion.
Bessent told CNBC last week 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, with the 30-year yield at one point reaching almost a 20-year high of 5.34%, up from 4.82% in late June. Yields dipped and then rebounded after the buyback announcement, which billionaire former energy trader John Arnold said reflects investors doubting the moves were adequate. "Markets are saying something," Arnold wrote in a Friday post on X, describing the weaker dollar, lower Treasury prices and strengthening hard assets as "all part of the debasement trade."

Nohshad Shah, Citadel Securities' head of fixed income sales for Europe, the Middle East and Africa, said the Treasury's moves could aid the bond market but also weigh heavily on the dollar. A weaker greenback can ease financial conditions, which is a risk given U.S. inflation has stayed above the Federal Reserve's 2% target for five years. Shah said the Fed might need to hike interest rates in response; Fed funds futures now reflect about a 56% chance of a rate hike at the October meeting, up more than seven percentage points from a week earlier, according to CME's FedWatch tool. "The bond market's message is straightforward: fiscal or monetary policy should be tighter," Shah said in a Monday note.

Coltman said demand for alternative stores of value also stems from geopolitical tension, noting the U.S. rolled out a global sanctions program on Monday targeting Iran, days after imposing 50% tariffs on billions of dollars of Canadian exports.

Read the original report at CNBC

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