Wall Street is getting nervous about the government's checkbook again.
Gold and bitcoin are drawing inflows because investors are increasingly anxious about the scale and expense of the federal government's budget shortfall.
Last week, the Treasury Department made an unusual move. The Treasury Department broadened the bond buyback program's ceiling to $4 billion or more, up from a previous $2 billion cap. CNBC was told by two senior Treasury officials that the plan could be partly funded through the department's General Account.
The reaction was immediate. Long-dated Treasury yields surged, and the 30-year yield came close to 5.34%, a level last seen around two decades ago, compared with 4.82% in late June. After the buyback announcement, yields dipped then rebounded, which suggests bond investors saw Bessent's actions as not enough.
"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, who heads macro at 21Shares.
The signal was clear: the government is willing to play games with its debt. John Arnold summed it up in a Friday post on X, writing "Markets are saying something" and calling it "all part of the debasement trade."
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The backdrop is troubling. The July U.S. monthly budget deficit hit a five-year high, while the federal government's aggregate debt surpassed $40 trillion. That is a lot of federal borrowing, and investors are starting to question whether the dollar will hold its value.
Last week, the dollar index - which measures the greenback against six major currencies - sank to a three-month trough and notched its third decline in four weeks. A weaker dollar makes gold and bitcoin more attractive since they're priced in dollars.
Both are classic debasement plays.
"The bond market's message is straightforward: fiscal or monetary policy should be tighter," said Nohshad Shah in a Monday note. He warned that a weaker dollar could ease financial conditions while worsening inflation, which has been above the Fed's 2% target for five years.
The Fed might be feeling the pressure. Fed funds futures now imply about a 56% probability that the Fed will raise rates at its October meeting, a gain of more than seven percentage points over the past week, according to CME's FedWatch. That's a big shift in expectations.
Some big names are doubling down on the trade. Ray Dalio recommended that investors stay overweight gold and bitcoin ahead of a potential U.S. debt crisis and suggested gold could constitute 15% of a model portfolio. "The government's financial condition is at an inflection point," he wrote on LinkedIn Friday. "If this is not dealt with now, the debts will build up to levels where they can't be managed without great trauma."
Deutsche Bank analyst Michael Hsueh said gold could surpass his target of $4,800 an ounce, which would require only about a 3% rise from Friday's close. "We see the Treasury policy change as underlining the gold constructive view," he said.
Coltman at 21Shares also tied demand for alternative stores of value to geopolitical tensions, including fresh U.S. sanctions on Iran and 50 percent tariffs on Canadian exports worth billions. Bessent called it a "big toolkit" in his CNBC interview.
Not everyone is convinced. Alexander Lis of Social Discovery Ventures is skeptical, saying it's too early to endorse the debasement trade unless the Fed aligns with the Treasury.
Why does it matter? If the dollar keeps sliding and debt keeps growing, the assets in your portfolio that hold value outside the government's reach could keep climbing. "Households may ultimately pay for policymakers' unwillingness to fix the roof whilst the sun is shining," Shah said. That's a warning worth taking seriously.
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