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.
Wolf, we must differentiate between losing “liquidity” for a time vs. losing “capital”. SPY, QQQ, DIA “cannot”
go to zero, but can certainly stay down 50% for a while.
Cryptos can go and many did go to zero. Many thousands of stocks went to zero, including formerly very big stocks. Many thousands of bonds went to zero. Lots of real estate investments went to zero for the owners when the lenders took possession of them. Even some real estate debt investments went to zero for lenders. Options go to zero routinely all the time. Those things are NOT coming back. They’re gone, vanished. Zeroed out from your portfolio forever. The list of what instruments went to zero is very very long.
ETFs can go to zero, or almost zero, such as the ProShares UltraPro Short QQQ that since inception has lost about 100% of its value, though it’s still out there getting traded.
Others went down a lot, including index funds that track the Nasdaq, which went down by 78% from March 2000 – Sep 2002, and stayed below its 2000 high for 15 years. S&P 500 tracking funds went down by 50% twice in the last 25 years.
Treasury Direct is mich easier then rolling CDs every 3 months. You can set any timeline (up to 2 years with T-Bills), build a ladder, so some money returns to your bank account automatocally. You will get approx 4.2% on 1m T-Bill now and it can be reinvested automatically ( up to 2 years). You avoid state tax on interest I think.
I do not believe there is better or easier “risk free” option right now. Paying off one’s mortgage is an option for some.
I asked AI about this. It says –
Quickly! Sell you car, buy triple-short ETF!!
It actually pointed me to some Farmers credit union 5.75% CD from July-September 2024. AI is pretty stupid.
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?
No. Gold is just a maniacally speculative laughable bubble commodity.
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.
No, they have not and China only has 3,300 metric tonnes of gold and all central banks have NOT added to gold reserves by much at all and have around 35,000 metric tonnes which is about the same as they had 10 years ago with the US having the largest gold holdings of around, 8,133 metric tonnes owned by the US Treasury valued at $42.22 per metric ounce.
Thanks wolf
“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.”
Are there sectors, such as pension funds and insurers, who are required to invest in AAA-rated paper and thus can’t always demand higher yields in the absence of a clearly better alternative? I think that some large, institutional purchasers have limited options, especially insofar as foreign government bonds present a similar currency debasement risk.
“who are required to invest in AAA-rated paper”
no, not in the US
No exactly. No “mandate” per se, but banking (Basel III), insurance, pension regulations require “high quality liquid assets”, of which Treasuries get highest status. All other assets, including AAA corporate bonds, ECB, SCB bonds, do not.
that “who are required to invest in AAA-rated paper” was the question to which I replied with NO. You’re replying to a question no one asked.
In addition, since you brought up Basel III, banks only hold a small portion (6.2%) of marketable Treasury securities, or $1.8 trillion of $29 trillion:
https://wolfstreet.com/2025/03/18/who-holds-the-ballooning-us-government-debt-even-as-the-fed-and-foreign-holders-unloaded-treasury-securities-in-q4/
Every political podcast now seems to have an ad selling gold. Dalio is on cnbc hyping it. There are swarms of substackers, Fintwit, podcasters that are absolute gold bull zealots. Reminds me a lot of 2011 when back then it was every AM radio talk show that was selling gold.
But we do have the $38T in nat debt projected to be $50T in 4 years by the CBO. And deficits aren’t getting smaller.
I was wondering that in 10 yrs probably what at least 25% of the older boomers will pass on? That means lots of people going OFF social security, medicare, medicaid, VA benefits due to dealth. And the Gen-Xers now starting to hit 60 are a much small generation. Will this do anything to the nat debt? Since most of the deficit is due to medicare, medicaid, ss, VA benefits?
USD is easily the best currency. EUR will always have crises as the monetary uniion isn’t supported by a fiscal union. Now it’s France’s turn to exceed the debt limit. GBP is a problem because of UK budget defecit. CNY is restricted. AUD and CAD are cyclical currencies that are leveraged to growth and commodity prices.
Gold is in a bubble and crypto has no intrinsic value. Plus the big probelm with gold and crypto is their yield is 0. With equities you get dividends and bonds you get coupon payments. Not a big issue when bonds where yielding next to nothing but you can now get decent returns, particularly on long duration treasuries. And US equties are priced to perfection with, I believe, more downside than upside. Plus credit spreads are unusually low making junk bonds unattractive. In my view, this leaves T-Bonds as the most attracive investment opportunity.
That boring 4% return may end up looking amazing compared to 40% losses everywhere else.
With Wolf showing persistent services inflation that isn’t showing signs of getting down to 2% in any hurry, I don’t know who is buying a 10y at 4% yield. Equity prices are insane, so maybe 1% real gain doesn’t look that bad to the big boys?
Personally I’ve shifted to paying down my 4.1% mortgage as fast as I can. Not seeing yield on bonds/bills/notes, and not really looking to increase my US stock exposure (I’m probably 70%+ today). Might as well get some tax efficiency.
Would love somewhere reasonable to throw money in a 3% inflation environment with even more US govn’t debt to be financed in the next 5 years.
Yes this is exactly where I am regarding where to put new funds to work. It is tough to find anything that isn’t already overpriced or at risk for another mini- or major correction. I guess I will just keep parking in ST CDs, etc.