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 remain elevated for a longer period. This provides a sustained tailwind for both gold and BTC: because it releases liquidity on one hand, and removes duration risk from the balance sheets of the private sector on the other.
The most critical macro price today is no longer the federal funds rate, but the yield at which investors are willing to hold long-term U.S. Treasury bonds.
As of August 24, the 10-year Treasury yield was around 4.70%, and the 30-year yield had recently touched about 5.23%, nearing a two-decade high. This upward move cannot be explained by a single factor. It is the confluence of several forces: persistent inflation risks, ongoing large-scale fiscal supply, thinning marginal demand for long-duration assets, 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 ceiling for its liquidity-supporting repurchase operations. The news triggered a brief pullback in yields, but the gains could not be held. This indicates that the underlying supply and inflation issues cannot be bought back with a few tens of billions in repo operations.
Why U.S. Bonds Are Under Pressure
The war in Iran is a catalyst on several levels:
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It pushes up oil prices, intensifies cost pressures, and may simultaneously suppress real growth and tax revenue.
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It raises expenditure expectations: gaps in military supplies are being exposed, and adapting to new forms of warfare requires investment.
AI is also a catalyst, but in a completely different way:
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Massive investment will boost economic growth and near-term inflation. Overall, this can be considered positive, as it increases the possibility of "thinning out the debt ratio through growth."
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However, on the other hand, this investment has a voracious appetite for capital, and this demand is already spilling over into the bond market. The balance sheets of hyperscale cloud providers, which are healthy, are now competing with the Treasury for funds in the long-duration segments that were previously dominated by governments.
The Bank for International Settlements estimates that the total bond issuance volume of hyperscale firms will exceed $100 billion in 2025, primarily in long tenors. An analysis from the Dallas Fed uses a figure around $300 billion to represent the investment-grade issuance scale related to AI. After duration adjustment, this is equivalent to up to $360 billion in 10-year equivalent duration.
Therefore, in my view, the U.S. faces a difficult-to-resolve trilemma. And it is becoming increasingly clear that strictly controlling inflation is the politically most expendable corner of the three.
U.S. Treasury Secretary Besant's Response: First, Secure the Treasury Market
Besant's recent actions show how closely he is watching the bond market.
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Support the Yen to reduce the risk of Japan being forced to sell U.S. bonds. Japan is the largest foreign holder of U.S. Treasuries. When it buys yen to support its currency, it needs dollars, and selling U.S. bonds is one way to obtain them: but this would amplify pressure in the Treasury market. Therefore, supporting the yen also reduces the likelihood that Japan will sell Treasuries to fund intervention.
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Repo illiquid long-end bonds. Repo does not equal debt cancellation. If financed by issuing new short-term Treasury bills, it changes the maturity structure of government liabilities: duration is reduced on one end, while short-term bills increase on the other.
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Shifting issuance towards the short end is likely the next step.
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In 2023-24, during the Yellen era, the Treasury heavily relied on short-term bills to meet surging financing needs. Stephen Miran and Nouriel Roubini, in a 2024 paper, termed this practice "aggressive Treasury issuance." Their argument is that the issuance of roughly $800 billion more in short-term bills than the conventional path sucked duration out of the market, with an effect analogous to "stealth QE," easing financial conditions to a degree roughly equivalent to a one-percentage-point rate cut; they also accused the Treasury of using this 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 Secured a Seat
Gold's current rally is not a simple inflation trade. From August 1, 2024, to August 24, 2026, the gold price rose from $2,455 per ounce to $4,664, a gain of approximately 90%. The drivers behind this include: declining trust in the U.S. dollar after its use as a policy weapon, lingering inflation concerns, and perhaps the most critical one: the logic of debasement—expanding the money supply might be the only politically viable path out of this debt cycle.
Is Bitcoin Qualified to Enter the "Debasement Hedge" Category?
Not yet, but the recent rally makes this question worth serious discussion.
In the previous rally led by gold, from October 1, 2025, to gold's peak on January 29, 2026, gold rose 39.6%, while Bitcoin fell 30.4%. For an asset that packages itself as "digital gold," this performance was unflattering.
Recent price action has been different. From August 18 to 24, Bitcoin rose 22.2%, while gold gained 5.9%. This surge began accelerating after the Treasury increased long-end repo operations. However, Washington was also pushing for crypto legislation during the same week, so attribution is not pure. If the market treats it as a stealth QE trade rather than a pure debasement trade, then Bitcoin's outperformance makes sense and is more likely to persist: when global liquidity widens, crypto assets often react strongly.
Conclusion, and What Could Overturn It
This trilemma does not mean inflation will necessarily spiral out of control, or that formal yield curve control is imminent. It is merely a framework to see where the constraints truly lie.
If inflation continues to run above target, the deficit remains around 6% of GDP, and AI-related borrowers keep adding long-duration supply, then the cost of simultaneously preserving 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, scenarios that would weaken this thesis include: inflation falling back near 2%, Congress presenting a credible fiscal path, AI infrastructure becoming self-financing, or private demand absorbing the issuance of interest-bearing debt without demanding a higher term premium.
Therefore, the market's next question should not be "when will the Fed cut rates," but this one: which corner of the triangle will Washington allow to break first? If the Treasury accelerates this duration transfer, Bitcoin could face a more sustained tailwind.
