The bond market has taken the opposite bet, and the dollar has strengthened.
By Wolf Richter for WOLF STREET.
A hot theme widely banded about to pump up cryptos, gold, silver, and even stocks is the so-called “currency debasement trade.” The idea is that enough traders rally behind a common theme to move prices in their direction for long enough to make a serious buck and generate fees from the trading.
This debasement-trade theme is a bet that government borrowing and money printing will erode the value of the US dollar dramatically and quickly, and that therefore enough investors will pile into cryptos, gold, silver, and even stocks, to cause prices of those instruments to explode. And they did.
But the huge bond market has taken the opposite bet, led by the $29-trillion Treasury market, the $11-trillion corporate bond market, the $9-trillion residential MBS market, the $4-trillion municipal bond market, plus the other segments of the bond market, where yields have fallen this year and have been in the same relatively narrow range for the past three years.
These bond investors bet that inflation will cool further over the longer horizon, and that the relatively low yields they get on their securities will therefore adequately remunerate them for inflation and for the risks they’re taking, and that the cooling of inflation will cause yields to decline further in the future, thereby pushing up prices of bonds that had been issued earlier at higher yields.
If the bond market were fearing a rapid and substantial debasement of the US dollar – the theme being hyped by the debasement trade promoters – it would demand much higher yields. But that hasn’t been the case.
The 10-year Treasury yield, for example — now barely above 4% as of Friday evening (bond markets are closed today) — has been on a downtrend this year and has been roughly in the same range for three years:
But, but, but, the US dollar…. The dollar’s drop during the first half of 2025 has been falsely promoted in clickbait headlines and by braindead manipulative talking heads on TV, as “the steepest decline in more than a half a century,” or whatever.
What did occur is that the dollar indices had spiked in the last four months of 2024 and topped out at the very end of December. And that four-month spike was then unwound-plus-some over the six months exactly from the beginning of January through the beginning of July, with the euro and yen dominated DXY Dollar Index dropping 11% and the broader WSJ Dollar Index [BUXX] dropping 9% over the first six months of the year.
But even bigger six-month drops were common and bottomed out in:
- April 2023
- September 2020
- November 2010
- August 2009
- April 2008
- June 2007
- Etc., all the way back to Adam and Eve.
The only thing that was unique about the 6-month drop in 2025 was that it started at the beginning of January. Only the start date was unique.
This chart shows the 6-month percentage change of the WSJ Dollar Index [BUXX], which tracks a basket of 16 major currencies.
The blue line indicates the 6-month 9% drop from the beginning of January through the beginning of July. Note all the even bigger 6-month drops that have dropped through the blue line over the past 23 years.
And of course, the dollar has bounced back some since the beginning of July with the WSJ Dollar Index rising today to 96.4, up by 2.6% from the low at the beginning of July.
The 16 currencies in the trade-weighted index are: Euro, Japanese Yen, Chinese Yuan, Canadian Dollar, Mexican Peso, South Korean Won, New Taiwan Dollar, Indian Rupee, Hong Kong Dollar, Singapore Dollar, British Pound, Australian Dollar, New Zealand Dollar, Norwegian Krone, Swiss Franc, and the Swedish Krona.
The Fed has been doing the opposite of “money printing” for over three years, having shed $2.4 trillion in assets by now – “money unprinting?” – and it continues to shed assets under its Quantitative Tightening program, and folks promoting the debasement trade need to take a look at this:
Other central banks too have been shedding assets under their QT programs, most notably the ECB and the Bank of Japan. Here are the balance sheets of some of the major central banks in relationship to the size of their economies, another eye-opener of what the debasement trade faces: Amazing How the Money-Printing World Has Reversed.
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Too many moving parts at the moment to understand bond yields. There is a huge amount of manipulative accounting and regulation to push bond yields lower. For example, if the GSEs didn’t exist and the Fed didn’t own any mortgages, what would that do to mortgage rates, bleeding over to all the other bond instrument yields?
Mortgage rates would surely be higher without the taxpayer on the hook.
TYPO:
What did occur is that the dollar indices had spiked in the last four months of 2025
Should be 2024.
Thanks for all you do!
Not so much a debasement trade, but an effort to not be in anything $ denominated-such as stocks, bonds, cryptos, myrrh, etc.
At the start of the pandemic I bought a pound of gold, 16 one oz bars. This week I bough a gold miner ETF – GDX, and a Silver ETF – AGQ. Just before the last fed meeting where they lowered rates by .25 I started to go short with SDOW & SQQQ. All of these investments are up except SQQQ and if the dollar goes up just a bit more I plan to add a dollar short.
I’m hopeful the fear and panic will continue coming from the gold and silver sales folks and doomsday people or that our President keeps opening up his crazy mouth threatening tariffs… also I hope not too many people discover Wolf.
As for money printing, sure they’re tightening by shedding balance sheet assets, but the national debt, personal debt, and funny crypto money and all manner of assets at nosebleed levels, combined with what it takes to bring home a bag of groceries makes it pretty easy to be fooled into thinking they’re printing money, or that fiat money is being debased.
Great comment. The POTUS seems to get most of what he wants lately and he VERY much wants to run the economy hot. He VERY much wants the fed to abandon that imaginary 2 percent inflation target. He VERY much wants to rev up the crypto world too. It is going to be VERY fun to see if that giant bond industry is right about this or the POTUS gets to “grow our debt away”. I’ve got popcorn and a great view of the battlefield!
Cryptos are being debased each and every day by definition via mining of new cryptos. And there are now tens of thousands of cryptos. But it doesn’t really matter because they’re just gambling tokens anyway.
I’m just having a hard time figuring out to do right now with new investments. I feel like I have enough bitcoin exposure, which I know this community generally frowns upon. I also feel like plowing even more money into stocks right now at these insane valuations is also risky, and I certainly have enough stock market exposure in my other accounts.
I have never been a big gold guy, but I have added a minimal amount just for some exposure over the last six months. If you have $550,000 of liquidity to work with, which I currently do, do you just keep rolling over 3-month CDs? That is what I have been doing, but now we have a dovish Fed.
I don’t need AI-like gains, but something better than 3.75% to 4% sure would be helpful. I know this is a first world problem, but any thoughts are appreciated (if this is even allowed). I am just frustrated with the CD returns and am wary of this market where one Truth Social post craters the market.
How much risk are you willing to take with that investment? Are you willing to lose 20% or 50% of that investment? 100% (all of it)? That’s the first question you need to answer to yourself.
What about the Treasury debasing the $USD with an impending debt refinance bubble and continued COVID era deficit spending? Couldn’t gold be seen and a forward looking hedge to this and wouldn’t bond yields begin to spike as the market is flooded with new and refinanced notes? Or are you saying the market has already been flooded with these notes and they are still being gobbled up at depressed yields?
The debasement trade is just the latest rationalization for line go up FOMO idiots. There’s always a new reason that valuations don’t matter.
I think we are the only ones that want to know the truth!
The Chinese along with every other central bank in the world has been adding to their gold reserves. Apparently these people are chumps and the place to be is low yield US bonds.
The article doesn’t say anything like that. You need to read what the text actually says before posting BS.
Thanks wolf