Author | Momir @ IOSG
Core Thesis: Washington will most likely choose to preserve the stability of the Treasury market and the AI investment cycle, at the cost of allowing inflation to linger at elevated levels for longer. This represents a persistent tailwind for both gold and BTC: because it releases liquidity on one hand, and removes duration risk from the private sector's balance sheets on the other.
The most critical macro price today is no longer the federal funds rate, but the yield investors are willing to accept to hold long-term U.S. Treasury bonds.
As of August 24, the 10-year Treasury yield stood at approximately 4.70%, and the 30-year yield had recently touched around 5.23%, nearing a two-decade high. This upward move cannot be explained by a single factor. It's the confluence of several forces: stubbornly persistent inflation risks, continuous heavy fiscal supply, thinning marginal demand willing to take on long duration, plus a new competitor for capital: AI infrastructure. The result is that investors demand higher compensation to hold long bonds.
To suppress the long end, the Treasury Department indicated it would at least double the size cap for liquidity support repo operations. Yields briefly fell on the news but couldn't hold the gains. This suggests the underlying supply and inflation issues can't be bought back by a few billion dollars in repos.
Why Treasuries Are Under Pressure
The Iran war acts as a catalyst on several levels: it pushes up oil prices, exacerbates cost pressures, while potentially suppressing real growth and tax revenues. It raises spending expectations: gaps in military supply are exposed, and adapting to new forms of warfare requires investment.
AI is also a catalyst, but in a completely different way: massive investment will boost economic growth and near-term inflation. On the whole, this is a good thing because it increases the possibility of "growing out of the debt ratio." But on the other hand, this investment has a voracious appetite for capital, and this demand is already spilling over into the bond market. Hyper-scale cloud companies with healthy balance sheets are now competing with the Treasury for funding in the same long-dated tenors that were previously dominated by government issuance.
The Bank for International Settlements estimates that total bond issuance by hyper-scale firms in 2025 will exceed $100 billion, predominantly in long tenors. An analysis from the Dallas Fed used a figure of roughly $300 billion to represent the scale of AI-related investment-grade issuance. After duration adjustment, this equates to up to $360 billion in 10-year equivalent duration.
Therefore, in my view, the U.S. is facing a difficult trilemma. And it's becoming increasingly apparent that strictly controlling inflation is the most politically expendable corner of the three.
U.S. Treasury Secretary Besant's Response: First, Defend the Treasury Market
Besant's recent actions reveal how closely she is watching the bond market.
-
Defend the Yen, reducing the risk Japan is forced to sell Treasuries. Japan is the largest overseas holder of U.S. Treasuries. It needs dollars when buying yen for intervention, and selling Treasuries is one way to get dollars – but this would amplify pressure in the Treasury market. So defending the yen also reduces the likelihood Japan sells Treasuries to fund interventions.
-
Repo illiquid long-dated bonds. Repos do not equal debt cancellation. If financed by issuing new short-term T-bills, it changes the maturity structure of government liabilities: duration is reduced on one end, and short-term bills increase on the other.
-
Shift issuance towards the short end. This is likely the next step. In 2023–24, during a surge in funding needs, Treasury under Yellen heavily relied on short-term bills. Stephen Miran and Nouriel Roubini, in a 2024 paper, termed this approach "aggressive Treasury issuance." Their argument is that roughly $800 billion in bill issuance beyond the normal path sucked duration out of the market, an effect analogous to "stealth QE," easing financial conditions by roughly the equivalent of a one percentage point rate cut; they also accused Treasury of using it to boost the Biden administration's prospects in the 2024 election. The likelihood of Trump's Treasury employing similar tactics is increasing.
If these operations proceed as expected, they could unleash a significant wave of liquidity, reigniting the "currency debasement trade."
Gold Has Already Secured a Seat
This gold rally is not merely an inflation trade. From August 1, 2024, to August 24, 2026, gold rose from $2,455 per ounce to $4,664, a gain of approximately 90%. The drivers behind this include: declining trust in the dollar after its use as a policy weapon, lingering inflation fears, and perhaps the most crucial factor: the debasement narrative – that expanding the money supply might be the only politically feasible path out of this debt cycle.
Has Bitcoin Earned Its Place in the "Debasement Hedge" Category?
Not yet, but the recent move makes the question worth serious discussion.
In the previous gold-led rally, from October 1, 2025, to gold's peak on January 29, 2026, gold rose 39.6%, while Bitcoin fell 30.4%. For an asset marketed as "digital gold," that's a poor showing.
The recent price action is different. From August 18 to 24, Bitcoin rose 22.2%, while gold rose 5.9%. This surge began accelerating after Treasury announced larger long-end repos. However, Washington was also pushing crypto legislation that same week, so attribution isn't pure. If the market views it as a stealth QE trade rather than a pure debasement trade, then Bitcoin's outperformance makes sense and is more likely to persist: crypto assets tend to react strongly when global liquidity widens.
Conclusion, and What Could Overturn It
This trilemma doesn't mean inflation will inevitably spiral out of control, or that formal yield curve control is imminent. It's merely a framework for seeing where the constraints truly bind.
If inflation remains above target, the deficit stays around 6% of GDP, and AI-related borrowers continue adding long-duration supply, then the price of preserving both Treasury market stability and the growth cycle will increasingly manifest as: shorter debt maturities, normalized liquidity backstops, and tolerance for higher inflation risks. This is bullish for gold and BTC.
Conversely, this view would be undermined by scenarios such as: inflation returning near 2%, Congress presenting a credible fiscal path, AI infrastructure becoming self-funding, or private demand absorbing coupon-bearing issuance without demanding higher term premiums.
Therefore, the market's next question shouldn't be "when will the Fed cut," but this: which corner of the triangle will Washington let break first? If the Treasury accelerates this duration transfer, a more sustained tailwind lies ahead for Bitcoin.
