[LONDON] US Treasury secretary Scott Bessent’s bid to tame US borrowing costs knocked down long-term yields for barely a day. The more lasting market signal: the dollar weakened while gold and Bitcoin rallied, reinforcing a debasement trade fuelled by swelling US deficits and concerns over the direction of US economic policy.
The divergence exposed a deeper predicament. Washington wants cheaper money even as inflation remains a constraint on the Federal Reserve. And it comes just as governments and companies are competing more fiercely for capital, from large-scale public borrowing to the vast sums pouring into artificial intelligence.
The AI boom sits on both sides of that contest. Financing it adds another enormous claim on debt markets, while the profits investors expect it to generate are helping stocks withstand its rising cost. With equities proving resilient, some of the anxiety over has instead surfaced elsewhere.
Bessent’s intervention also revealed Washington’s pain threshold for higher yields. For Charlie McElligott of Nomura, the market response showed where some of that pressure was going: he described the gold-up, dollar-down move, with Bitcoin also rallying, as a “pressure-release valve” as US authorities sought to stabilise long-term rates.
Ray Dalio gave the trade a more ominous reading on Friday (Aug 21), urging investors to cut bond exposure and hold gold and some Bitcoin as protection against a potential US debt crisis.
By Friday, the market signals remained uneven. Stocks recovered as US business activity expanded at the fastest pace in more than four years, and long-dated Treasuries headed for a roughly flat week. Bitcoin, meanwhile, was around US$77,000 and gold climbed to a three-month high.
After Treasury said it would at least double the size of some buybacks of 10 to 30-year debt, Bessent told CNBC that the market had “gotten a little ahead of itself” and touted the department’s “big tool kit”.
The problem is that the fundamentals are pushing the other way.
The US government is running a deficit of nearly US$2 trillion, higher oil prices are adding to inflation risks and governments globally are borrowing more for defence, energy and social spending. Companies, meanwhile, are raising growing sums for AI, data centres, chips and power.
Barclays strategists said rising corporate issuance, particularly from hyperscalers financing AI investment, is adding to pressure on long-term rates. The takeaway: Treasury can change the supply of duration. It cannot eliminate the demand for capital.
“Stocks have to price in higher discount rate,” said Priya Misra, portfolio manager at JPMorgan Asset Management, citing a “global competition for capital – from governments that are financing defence and energy security and social programmes to financing needs all along the AI ecosystem”.
On Thursday, Bessent showed signs of frustration at the impact of AI borrowing on Treasury yields. He told CNBC that such firms’ debt issuance strategy was “almost yield-agnostic because the build-out for AI, the returns on that, the companies believe they’re going to be so high. They don’t really care what they’re paying”.
Yet while Bessent revealed Washington’s sensitivity to higher borrowing costs, investors were left confronting essentially the same forces that had driven yields up in the first place.
“The Treasury can influence liquidity and sentiment, but it can’t sustainably override growth, inflation, deficits and supply,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management.
Markets may also be learning to fade policy disruptions from Washington faster.
“I think the market fades policy changes faster because there is an element of a stock market put within this administration. Time and time again, we have seen Trump or Treasury step in with policy changes when there is angst in the risk or bond markets,” Misra said.
Stocks, at least, have had a powerful defence: earnings. Florian Ielpo of Lombard Odier argued that markets have a much bigger number to trade: “A 20 per cent earnings surprise is the big number for 2026, not a Treasury operation of more than US$4 billion.”
That helps explain why equities largely looked through both Bessent and the renewed pressure from bonds. But Treasuries yielding around 5 per cent are becoming tougher competition for expensive stocks, raising the earnings hurdle as the risk-free rate climbs.
Bank of America’s Michael Hartnett sees the 30-year yield at 5 per cent as an important dividing line. Failure to get below it, he said, risks intensifying pressure on the dollar and highly leveraged corners of the market, including AI hyperscalers and private credit.
Meanwhile, the debasement trade has something the bonds lack: a more compelling narrative.
The dollar weakened as gold and Bitcoin rose, with Barclays calling the dollar the “main casualty” of efforts to contain yields as fiscal concerns revived demand for gold.
Bitcoin’s 90-day correlation with gold is at its most positive since the pandemic, reinforcing the idea of the cryptocurrency as a debasement trade alongside the precious metal – even as crypto-specific catalysts also fuelled this week’s rally.
Still, there are limits to how far Treasury can take the bond-market fight. It can alter the amount and maturity of debt investors must absorb; it cannot create money. The Fed can.
Yet Fed chairman Kevin Warsh has emphasised shrinking the central bank’s footprint in markets, leaving Washington wanting lower borrowing costs at a time when resilient growth, inflation and heavy investment are helping keep them high.
Next week may test that tension. Nvidia’s results will show whether AI earnings remain strong enough to keep stocks resilient in the face of higher rates. At Jackson Hole, investors will look for signs that the Fed shares Washington’s desire for easier financial conditions.
Whether this week’s burst of enthusiasm for the debasement trade proves durable is another question. Brent Donnelly, president of Spectra Markets, initially took Bessent’s announcement as a signal to buy Bitcoin and sell the dollar against the Swiss franc. But the small scale of the buybacks relative to the Treasury market has since given him second thoughts.
“I think there is a very strong chance that these epic moves in the US dollar and gold and Bitcoin will cool substantially from here,” he said. “Bessent’s actions reinforce structural themes, but those themes are not new and there is no proximate catalyst to trigger the next leg of the debasement trade.” BLOOMBERG
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