Debasement Trade Complicates Market Outlook

Investors are embracing the so-called debasement trade as they bet on currency weakness and rising inflation. The US Treasury's decision to increase long-term debt buybacks has drawn attention, but according to Alexander Lis, chief investment officer at SDV, this is not quantitative easing (QE) like the Federal Reserve's asset-purchase programs.

The key issue is how the operation is funded: the Treasury can finance the buybacks by issuing shorter-term bills while buying longer-term securities. This effectively changes the maturity profile of government debt rather than creating new money, making the operation fundamentally different from QE.

Lis argued that shifting away from longer-duration securities can reduce volatility in the fixed-income market and increase usable collateral across financial markets, which could create a broader risk-on effect without requiring the central bank to print money. This could lead to higher prices for assets like Bitcoin and gold as investors seek safe-havens.

Lis noted that crypto has a high beta to debasement, meaning it could outperform gold if the narrative strengthens, but also suffer more significantly if the narrative fades. He does not expect the start of Treasury buybacks to be the next major market-moving event, but rather is watching the next Treasury Quarterly Refunding Announcement and the Federal Reserve's September meeting.