The U.S. Treasury's recent decision to expand its bond buyback program, doubling the maximum size to at least $4 billion, has reignited fears of "dollar debasement" and is driving investors towards perceived hard assets. This move, aimed at managing rising U.S. borrowing costs, was quickly followed by a weakening dollar and rallies in gold and Bitcoin, reinforcing a narrative driven by swelling U.S. deficits and a federal government debt topping $40 trillion. Long-dated U.S. Treasury yields had previously surged, with the 30-year yield reaching a near 20-year high of 5.34%.
Investors are increasingly seeing assets like gold and cryptocurrencies as hedges against a weaker U.S. dollar and growing Treasury debt. Gold has touched three-month highs, climbing for five straight weeks and experiencing its biggest monthly rise since 1999 in August. Bitcoin also saw significant gains, up 2% on Monday to its highest since May and soaring 22% last week, touching $80,000 overnight Tuesday. Conversely, the U.S. dollar index hit three-month lows last week, recording its third down week in the last four.
The 'debasement trade' is further benefiting emerging market (EM) carry trades, where investors borrow in low-yielding currencies like the dollar and invest in higher-yielding EM currencies. Dollar-funded carry trades have seen their longest winning run since 2008, yielding positive returns for a seventh successive quarter. Returns have been amplified by the weakening dollar, with dollar-funded carry trades earning 48% in Colombian pesos, 23% in Turkish liras, 21% in Brazilian reais, 19% in Mexican pesos, and 18% in South African rand over the past 12 months. This trend is expected to continue, with analysts citing the U.S. administration's low tolerance for rising bond yields as a catalyst for the long EM carry trade.
Analysts are also bullish on gold, with Deutsche Bank's Michael Hsueh suggesting gold could surpass his target price of $4,800 an ounce, needing only another 3% rise from its Friday close. Billionaire investor Ray Dalio has recommended investors remain overweight gold and Bitcoin, suggesting gold could comprise up to 15% of a model portfolio, due to concerns about a potential U.S. debt crisis. Nohshad Shah of Citadel Securities notes that while Treasury's moves might help the bond market, they could lead to significant pain for the dollar and potentially worsen U.S. inflation, which has been above the Federal Reserve's 2% target for five years.
Emerging-market inflation-linked bonds have been the best-performing major fixed-income trade of 2026, outperforming broad EM local indices by approximately eight times. This highlights that inflation, rather than just dollar weakness, has been a key variable influencing returns. The MSCI's emerging-market currency index has repeatedly hit records this year, gaining 3.6% since the end of 2025 and 11% since the end of 2024, with interest-rate carry expected to be the main driver of future returns.
