Beneath the surface of short-term fluctuations in financial markets, a long-term repricing across multiple asset classes may be underway — driven by investors seeking to hedge against risks posed by runaway fiscal deficits.

Last Friday, fresh tariff threats between China and the U.S. dominated headlines, prompting traders to flee risk assets in favor of bonds. Meanwhile, fund managers are increasingly discussing a phenomenon known as "debasement trading."

Investors subscribing to the "debasement trading" logic are withdrawing from sovereign bonds and their denominated currencies. They fear that as governments avoid addressing massive debt burdens or even expand them further, these assets' values will erode over time.

Adding fuel to the fire are market speculations that central banks will face mounting political pressure to maintain low interest rates to offset government debt pressures — a process that could exacerbate inflation through continued money printing.

Just last week, the yen and Japanese government bonds faced selling pressure as Sanae Takaichi, who favors economic stimulus policies, advanced toward the prime minister position. Fresh political turmoil stemming from France's fiscal problems hit the euro, while the UK's upcoming budget announcement has unsettled the bond market — the UK bond selloff in 2022 that led to then-Prime Minister Liz Truss's resignation still haunts the market, which has yet to fully recover.

Despite the U.S. government shutdown, the dollar (DX=F) has gained ground in recent weeks, though it remains weak for the year overall — previously, Donald Trump's trade wars and tax cut plans caused the dollar's most severe plunge since the early 1970s. His "America First" policies disrupted global order while challenging Federal Reserve independence, leading markets to question whether U.S. Treasuries can continue to fully maintain their status as the "world's primary risk-free asset" — a position that has long supported bond yields.

On the other side of "debasement trading," precious metals have benefited from their traditional safe-haven properties, while cryptocurrencies have rallied again as markets view them as a "safe harbor" against government policy shocks. Gold prices have surged over 50% this year, recently breaking through the historic $4,000 per ounce threshold, while silver prices have also soared to record highs.

Although Trump's latest tariff threats triggered market panic and sharp cryptocurrency declines, Bitcoin remains up over 20% year-to-date and previously hit all-time highs.

Analysis: Why is Wall Street So Focused on "Debasement Trading"?

Stephen Miller states that in his 40-year market career, he has never witnessed such a massive trend of capital flowing from currencies and U.S. Treasuries toward alternative assets. The former head of fixed income at BlackRock Australia believes this may be just the beginning.

Miller, who now serves as an advisor to GSFM under Canada's CI Financial Group, notes: "The debasement trading trend still has room to continue. U.S. Treasuries are no longer the unimpeachable safe-haven assets they once were, and this phenomenon exists in other bond markets as well."

Billionaires Ray Dalio and Ken Griffin made headlines for suggesting that "gold might be safer than the dollar." The head of Canada Pension Plan Investment Board believes U.S. Treasuries also face risks of losing their safe-haven status. Hedge fund advisor and author Nassim Taleb suggests that America's ballooning deficit is sowing seeds of a debt crisis that seems almost inevitable.

"The current world faces dual deterioration: on one hand, currency values are declining on an inflation-adjusted basis as economic activity slows; on the other hand, government stability is also declining," says Calvin Yang. He manages the Merlion Fund at Blue Edge Advisors in Singapore and has been increasing gold holdings recently.

The term "debasement" dates back to rulers like Henry VIII and Nero — who would mix cheaper metals like copper into gold and silver coins to dilute their value.

However, questions remain about whether a "modern version of currency debasement" is truly underway. The rise in gold and Bitcoin prices stems from multiple factors, and warnings of "imminent debt crisis" have repeatedly emerged since the global financial crisis, many proving premature.

After Russia's invasion of Ukraine led to frozen overseas assets, this event highlighted foreign exchange assets' vulnerability to external sanctions and enhanced gold's appeal. Central banks are also increasing gold reserves to diversify foreign exchange holdings.

Additionally, cryptocurrency markets have always seen sharp rallies and selloffs driven purely by market momentum: the notion of "Bitcoin as a safe-haven asset" has been repeatedly challenged — during post-pandemic inflation spikes, Bitcoin fell alongside other speculative assets; recent escalating trade tensions have again triggered Bitcoin crashes.

Despite recent volatility, the dollar, euro, and yen still dominate trading and banking systems, remaining central anchors for trillions of dollars in daily transactions. Government bonds likewise serve as crucial collateral frameworks supporting global financial system operations.

Furthermore, the continued rise of U.S. stock markets challenges the "debasement trading" logic — foreign investors need dollars to participate in U.S. equity trading, and despite disruptions from Trump's policies, overseas investors continue increasing their Treasury holdings.

"Those who think currencies and bonds can be replaced by Bitcoin and gold need a reality check," says Masashi Omori, chief trading strategist at Mizuho Securities Co. in Tokyo.

Omori believes the current market is witnessing merely "momentum trading" — where increasing numbers of investors pile into seemingly profitable trades regardless of fundamentals.

Bloomberg Strategist View...

"The term 'currency debasement' seems to reasonably describe recent months' market anomalies. But now that we've found an apt name for the current trading pattern, this perhaps signals everyone is overly tilted toward one direction, and markets may face volatility and reshuffling."

— Mark Cudmore, Executive Editor of Bloomberg's "Markets Live"

However, even if "currency debasement" ultimately proves to be an academic discussion that doesn't overturn market status quo, investors have ample reasonable grounds for engaging in this debate.

Strategists at Eurizon SLJ Capital Ltd. believe that governments have become "addicted to deficit spending" thanks to cheap funding floods from central banks' dramatic rate cuts and massive bond purchases during financial crises and the pandemic.

"If reserve managers continue reducing dollar holdings and all fiat currencies, gold prices could keep rising," the firm's strategists wrote in a report last week. "All else equal, when central banks' gold holdings match their dollar reserves, gold could reach $8,500 per ounce. This is not impossible."

Alberto Gallo of Andromeda Capital Management says the "currency debasement process" will accelerate as debt increases and populations age — this approach is easier for politicians than promoting economic growth or implementing fiscal austerity; he believes central banks may also be drawn into this process.

Gallo noted in a report: "Policymakers are brewing monetary policy reforms — whether revaluing gold reserve values, relaxing banking regulations, or adjusting central bank policy targets — the ultimate result could lead to entrenched inflation, further fiat currency devaluation, rising long-term interest rates, and positive correlation between risk-free and risk assets."

Taking just the United States as an example: the Federal Reserve maintains high rates to suppress inflation, which constrains economic growth; but the Trump administration's fiscal policy runs counter — its tax cut plans are expected to further expand deficits already approaching $2 trillion. The Government Accountability Office warned in February that by 2050, U.S. debt could approach twice the size of Gross Domestic Product (GDP).

Trump and his administration have also called for dramatic Fed rate cuts (partly because officials believe rate cuts could reduce debt costs) and attempted to remove Fed Governor Lisa Cook, testing the Fed's independence. Volatile trade war situations, government shutdowns, and presidential use of the Justice Department against domestic political opponents have all heightened market concerns about political dysfunction and policy uncertainty.

In France, Prime Minister Sebastian Le Cornu became the fifth prime minister to resign within two years due to budget deadlock, triggering renewed investor anxiety; however, he was reappointed as prime minister last week.

As for Japan, Sanae Takaichi's potential appointment as prime minister coincided with the collapse of the decades-long ruling coalition, deepening market doubts about Japan's prospects. This pro-stimulus lawmaker's victory in the party leadership election means the Bank of Japan's interest rate hike pace may slow despite inflation running well above the central bank's target.

Against this backdrop, some believe "debasement trading" has room for further continuation.

"This trend fully reflects changes in global dynamics and may indicate that digital assets are becoming more trusted value storage tools in the current environment," says Kathleen Brooks, Research Director at XTB Limited in London. "We believe this trend won't end in the short term."