Concerns over the increasing U.S. government budget deficit and rising federal debt have reignited interest in the so-called “debasement trade,” where investors seek protection against a weaker U.S. dollar and Treasury securities by moving into hard assets like gold and cryptocurrencies. This trend gained momentum following Treasury Secretary Scott Bessent’s announcement to double the maximum size of the government’s bond buyback program from $2 billion to at least $4 billion, a move seen as a signal amid worries about government spending and debt sustainability.

The impact on markets has been significant, with gold prices hitting three-month highs and experiencing their largest monthly gain since 1999, surging more than 5% in the past week alone. Bitcoin has also rallied strongly, climbing to levels not seen since May and briefly touching $80,000. On the flip side, the U.S. dollar weakened against other major currencies, with the dollar index reaching three-month lows and declining in most of the past four weeks. Meanwhile, Treasury yields soared, with the 30-year yield briefly reaching nearly a 20-year peak above 5.3%, reflecting investor unease despite Treasury’s intervention.

Market participants interpret these developments as a clear message that fiscal and monetary policies require tightening to address the growing risks. Experts like Nohshad Shah of Citadel Securities warn that the Treasury’s bond buybacks may alleviate bond market pressure but could further weaken the dollar, potentially leading to elevated inflation and increased pressure on the Federal Reserve to raise interest rates. Fed futures markets now price in a higher chance of a policy rate hike at the Fed’s October meeting as a response to these fiscal imbalances and inflation risks.

Despite some skepticism about the durability of the debasement trade, high-profile investors and analysts are bullish on the outlook for gold and bitcoin. Ray Dalio, founder of Bridgewater Associates, advocates maintaining overweight positions in these assets, citing the government’s precarious fiscal condition as a turning point that, if not addressed, could lead to severe financial disruption. Deutsche Bank also sees gold potentially breaking above $4,800 an ounce, reinforcing expectations for continued strength in traditional and digital hard assets as hedges against mounting debt and geopolitical uncertainties.