Pushback on the Debasement Trade
The debasement trade has many skeptics, but they are missing the big picture
As my readers will know, I think the “debasement trade” will be with us for many years to come. That’s not to say that I know how big this trade will ultimately end up being or which assets will benefit most. What I do know is markets are increasingly fearful that governments will try to inflate away unsustainably high debt levels. This is why long-term yields are rising all over the place, as markets start demanding higher risk premia. I also know this trade isn’t confined to one particular asset. More likely, this trade is a shape shifter that will pop up in one place and then another. None of this needs to be logical or consistent. The underlying driver powering this trade is fear. That’ll make this trade inherently non-linear and episodic.
There’s two main pushbacks to the debasement trade, which I address in this post. The first is that inflation break-evens for the US haven’t risen. If anything, they’ve fallen over the horizon that the debasement trade has become a thing, which - in the eyes of some - makes this trade a non-starter. The second is that longer-term yields on Treasuries have fallen in the course of 2025. That’s again being touted as a reason that the debasement trade can’t possibly be a thing. I don’t take either of these pushbacks very seriously. That’s primarily because I don’t think there’s any kind of transitivity condition that ensures consistency across markets. By this I mean that there doesn’t have to be a rise in inflation break-evens for the debasement trade to drive precious metals prices sharply higher. The move in inflation break-evens may come later or not at all. As far as longer-term Treasury yields go, the the simple fact is that - if you look at those properly - the picture is worrying.
The chart above decomposes the nominal 2-year Treasury yield (black) into the real yield (red) and the break-even (blue). There’s no denying that inflation break-evens have fallen in the course of 2025 as the inflation impulse from tariffs didn’t hit. But there’s no requirement that inflation break-evens start rising at the same time that the debasement trade starts driving people into precious metals. This just isn’t - in my view - about that kind of logical consistency. This trade is about fear - fear of losing your retirement savings - and nothing about that is going to be logical or linear.
As far as longer-term yields go, you don’t want to look at the 10-year Treasury yield, because that’s getting pulled down by increasingly dovish expectations for the Fed. You can take that effect out by looking at the 10y10y forward yield, which is shown in the chart above in the red line. That yield has remained stubbornly high even as the 2-year yield has fallen. No matter how you cut it, markets are demanding higher risk premia for longer-term Treasuries.
“I also know this trade isn’t confined to one particular asset. More likely, this trade is a shape shifter that will pop up in one place and then another. None of this needs to be logical or consistent. The underlying driver powering this trade is fear.”
Robin - great stuff, as always. If you study these dynamics from a multi-asset lens, I think you’ll find them more logical than the above.
Pre-GFC, the global economy generated large current account imbalances (surpluses) which were recycled into UST (intl gov’t bonds) because they’re safe and liquid. Global imbalances shrunk post-GFC, slowing the flow of UST accumulation. Simultaneously, reserve managers began diversifying their reserves, which were excessive and low-returning. For example, a fund manager who worked with SWFs once told me a client’s portfolio would be less volatile and higher returning if they invested some of their bonds into equities. This rebalancing out of bonds into other asset classes via multi-asset products has persisted since.
In short, reserve managers and quasi-sovereigns have become much more sophisticated in their understanding and implementation of investment strategies. This is an underappreciated driver of global rebalancing - read: the debasement trade. Even if logical, it can be non-linear and episodic given the role of illiquid assets and non-linear rebalancing strategies such strategies entail. Fear is very much a driver, including the logical fear of SWIFT weaponization, too - but you’ve already done a great job capturing that.
Exactly - even if not because of inflation BE raising, wouldn’t investor be affected nonetheless?