Treasury’s Bond Buyback Raises Dollar Debasement Fears as Currency Hits Multi-Week Lows

Treasury Secretary Scott Bessent has sparked intense debate over the dollar’s future after announcing an expansion of the government’s bond buyback program. The move, designed to improve liquidity in the long-term Treasury market, has instead triggered what Wall Street calls the “debasement trade” – a flight from the dollar into gold and Bitcoin amid fears the U.S. could follow Japan down a path of currency devaluation.

The DXY dollar index fell to 98.6630 Friday, bringing its decline over the month to 2.43% while fueling concerns that the greenback’s days as the world’s reserve currency may be waning. The Treasury Department announced Wednesday it would increase the maximum size of its liquidity-support buyback operations from $2 billion to at least $4 billion per operation beginning September 9, covering longer-dated Treasury securities. Bessent subsequently indicated the purchases could exceed $4 billion per operation.

The announcement initially pushed the dollar lower while sending Bitcoin above $72,000 and boosting gold to $4,671 per ounce. The simultaneous gains in gold and Bitcoin underscored the growing appeal of assets not directly tied to the U.S. government’s debt market, as Treasury market turmoil made non-interest-bearing assets relatively more attractive to investors seeking safety from potential dollar devaluation.

Economist Warns of Japan-Style Currency Spiral

Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, sounded the alarm on the Treasury Department’s plan in a Substack post Thursday. He dismissed the buyback scheme as mere financial engineering that doesn’t address the mounting stress in the Treasury market while confirming there’s no desire to tackle the underlying problem of the deficit, which is on track to reach $2 trillion this fiscal year.

“When fiscal policy is out of control, governments can obviously do many things to cap yields, but this just puts depreciation pressure on the currency because markets don’t get paid the kind of risk premium they desire,” Brooks wrote. “What would be a debt crisis thus morphs into a currency crisis, which is why the Yen has been falling for so many years.”

Brooks has long highlighted Japan’s efforts to keep its bond yields artificially low as a way of keeping its massive debt burden, which tops 200% of GDP, in check. With markets unable to price Japanese debt properly, investors have sent the yen lower over an extended period, creating a devaluation spiral that has proven difficult to reverse.

“Markets are primed for Dollar debasement to resume and – as Japan shows – it can be next to impossible to stabilize a currency once it enters a devaluation spiral,” Brooks warned. “The U.S. is playing with fire with this buyback.”

Treasury Intervention Raises Questions About Strong Dollar Policy

The Treasury Department’s unusual bond market intervention is prompting questions about its commitment to a longstanding cornerstone of American economic statecraft: the strong dollar policy. The policy is shorthand for the U.S. government’s commitment to policies guided by economic orthodoxy – concern over debt and deficits, non-intervention in markets, and central bank independence, among them – that have for the most part characterized both parties’ management of the economy for decades.

The current administration appears willing to jettison such niceties to achieve its goals, as the department’s move in the U.S. Treasury market Wednesday demonstrated. Other examples include purchasing stakes in multiple private companies, providing U.S. dollar swap lines to Argentina, intervening in currency markets, and putting pressure on the Federal Reserve to lower interest rates as recently as this week.

Treasury Secretary Scott Bessent appeared on CNBC Thursday morning emphasizing that the Treasury could buy back more than the $4 billion in long-term U.S. government bonds, the headline number it cited Wednesday in announcing plans to double the size of the auctions it uses to repurchase bonds from market participants. The stated justification for the buyback program is to remove illiquid long-end bonds from the market in order to improve trading conditions.

Wall Street Sees Rate Suppression as True Goal

The program also effectively reduces supply of long-term government debt, and lower supply in the face of steady demand raises the price of those bonds. Because bond prices and yields move in opposite directions, that reduces the yields on those Treasury bonds, which serve as key foundations for borrowing costs throughout the economy. Wall Street analysts believe lower rates were clearly the goal of the Treasury move, viewing it as part of a broader pattern of policy actions from Treasury in recent weeks aimed at containing the rise in long-term yields.

The announcement came after the 30-year yield hit the highest level in nearly 20 years. While yields briefly retreated, they soon climbed back to their earlier levels as Wall Street doubted Bessent’s ability to hold back the $32 trillion Treasury market. The 10-year Treasury yield climbed back toward 4.7% Thursday, while the 30-year yield remained above 5%, as investors continued to worry about inflation and government borrowing.

Scale of Intervention Questioned Against Massive Debt Burden

The scale of the intervention appears small compared with the size of the government’s obligations. The national debt crossed $40 trillion Wednesday, while the federal deficit was expected to exceed $2 trillion. Critics argue that buybacks of $4 billion or slightly more per operation represent a drop in the ocean relative to these staggering figures, raising questions about the program’s ultimate effectiveness in stabilizing Treasury markets.

A loss of the dollar’s reserve-currency status could hit Americans through weaker purchasing power and higher borrowing costs. A NBER study estimated that losing reserve status could cause an 8.8% real depreciation in the dollar and push U.S. real interest rates roughly 90 basis points higher, with far-reaching consequences for everyday Americans’ financial lives.

Economist Kenneth Rogoff has warned that a weaker dollar could also mean higher rates on home mortgages and car loans, estimating significant pain for American households if the currency enters a sustained devaluation trend. The simultaneous rise in alternative stores of value like gold and Bitcoin suggests markets are already beginning to price in such risks.

Dissenting Views Emerge on Debasement Concerns

Jonas Goltermann, chief markets economist at Capital Economics, said in a note Thursday that debasement trade worries are overblown and predicted the dollar would strengthen in the coming months on the back of the robust U.S. economy. The dollar’s recent drop was also consistent with differences in yields between countries, he argued, suggesting technical factors rather than fundamental currency debasement concerns may be driving recent price action.

Nevertheless, the Treasury’s willingness to intervene directly in bond markets – combined with pressure on the Federal Reserve and other departures from traditional economic orthodoxy – has created uncertainty about the administration’s long-term commitment to dollar strength. Whether the buyback program represents a temporary liquidity measure or the beginning of a more aggressive approach to managing Treasury yields remains to be seen, but markets are clearly pricing in heightened risk of the latter scenario.