The widening U.S. budget deficit and rising national debt are reigniting what Wall Street calls the "currency depreciation trade." Market sentiment is clear: gold and bitcoin are strengthening, the dollar is weakening, and long-term U.S. Treasuries are under pressure.
The Ministry of Finance increases treasury repurchase operations.
Last week, the U.S. Department of the Treasury stated that it would raise the single-limit for Treasury buybacks from $2 billion to at least $4 billion. Two senior Treasury officials subsequently indicated that the Treasury might also use funds from its general account to support this arrangement.
This move occurs against two backdrop: the U.S. monthly budget deficit rose to a five-year high in July, and the total federal debt surpassed $40 trillion. Previously, Secretary of the Treasury Scott Bessent stated that the Treasury has "many tools" available to stabilize the government bond market.
The market cares less about the size of the buyback itself and more about the signal it sends. Stephen Coltman, Head of Macro at 21Shares, an ETF issuer, says that while the currently announced purchase size is relatively small compared to the overall market, the signaling effect is strong.
Gold and Bitcoin are strengthening in tandem.
In such transactions, investors typically turn to assets considered better hedges against the decline in currency purchasing power, including precious metals and crypto assets.
Gold rose to a three-month high on Monday, following a more than 5% gain the previous week. On a monthly basis, August is on track to record the largest monthly increase since 1999, with prices rising for five consecutive weeks.
Bitcoin rose 2% on Monday to its highest level since May. Following a three-day cumulative gain of 22%, it posted its largest three-day increase since 2023. During Asian trading on Tuesday, Bitcoin briefly touched $80,000.
In contrast, the U.S. dollar has continued to weaken. The U.S. Dollar Index, which measures the dollar’s performance against six major currencies, fell to its lowest level in nearly three months last week, declining in three of the past four weeks and remaining essentially flat on Monday.
Long-term yields remain elevated.
Despite intervention by the Treasury to repurchase bonds, the U.S. Treasury market has not significantly stabilized. Last week, long-term U.S. Treasury yields rose sharply, with the 30-year yield approaching 5.34%, nearing a roughly 20-year high and clearly above 4.82% at the end of June.
After the repurchase announcement, yields initially fell before rebounding, indicating that bond investors do not believe the current measures are sufficient to alleviate pressure. Nohshad Shah, Head of Fixed Income Sales at Citadel, believes such operations may provide temporary support to the bond market but could further weaken the dollar and exacerbate inflationary pressures.
He stated that if the dollar continues to weaken and financial conditions ease accordingly, the Fed may be forced to maintain a tighter policy. CME FedWatch data shows that the market currently estimates a 56% probability of a Fed rate hike in October, up more than 7 percentage points from a week ago.
Wall Street remains divided in its assessment.
Some institutions believe this round of trading still has room to continue. Deutsche Bank analyst Michael Hsueh stated that gold prices could even surpass their target of $4,800 per ounce, noting that changes in Treasury policy have strengthened his bullish outlook on gold.
Ray Dalio, founder of Bridgewater Associates, also stated that the U.S. government's fiscal situation is at a turning point; if the issue is not addressed early, debt could accumulate to a level that is difficult to resolve without incurring enormous costs.
However, some investors believe it is still too early to fully embrace the "currency depreciation trade" logic. Alexander Lis, Chief Investment Officer at Social Discovery Ventures, said that whether this trade will persist remains to be seen unless it can be confirmed that the Federal Reserve will align with the Treasury’s direction.