By Jamie McGeever
ORLANDO, Florida (Reuters) -Wall Street and most global equity benchmarks rose sharply on Monday, as optimism around U.S. earnings and easing global trade tensions offset some of last week’s worries over frothy asset prices, private credit markets and U.S. regional banks.
More on that below. In my column today, I look at the so-called U.S. ‘debasement trade’. While debt and deficit worries are real and justified, the bond and currency markets suggest they are overdone.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
Today’s Key Market Moves
Today’s Talking Points:
* U.S. banking system liquidity
Debate is intensifying around whether liquidity in the U.S. banking system is shrinking to the point that could soon pose funding, collateral and broader market risks. The Fed could soon end its QT program, bank reserves are below $3 trillion, balances at the Fed’s overnight repo facility are almost zero, and usage of the Fed’s Standing Repo Facility has ticked up.
Some observers say alarm bells are ringing, and point to the recent wobbles in private credit and regional banks as evidence. Others are less worried, noting that while aggregate liquidity may be tightening, it is still plentiful and the Fed has several tools at its disposal should it need them. In short, there’s no cause for concern.
* Reading China’s GDP tea leaves
China’s headline Q3 GDP figures showed stronger-than-expected quarterly growth of 1.1% and annual growth of 4.8%, which was slower than Q2 but in line with forecasts. On the face of it, China seems to be managing to shrug off the trade tension and tariff uncertainty.
But under the surface, there is perhaps more cause for concern. House prices continue to fall, and more importantly, fixed asset investment fell for the first time ever, excluding the pandemic. An “alarming” development that points to downside risks for Q4 GDP, reckons Zhiwei Zhang at Pinpoint Asset Management.
* The importance of rare earths
Official Chinese data also showed that exports of rare earth magnets fell in September, reigniting fears that the world’s top supplier could wield its dominance over a component that is critical for U.S. defense firms and makers of items from cars to smartphones. And increasingly central to U.S.-China trade relations.
U.S. President Donald Trump said he expects to secure a “fair” trade deal with China and plans to meet President Xi Jinping in South Korea next week. Trump and Australian Prime Minister Anthony Albanese signed a rare earths deal on Monday, and Trump said he is working on deals with other countries.
Debasing the ‘debasement’ trade
The recent surge in gold, cryptocurrencies and stocks to record highs has sparked claims that the U.S. “debasement trade” is in full swing, but the bond and the foreign exchange markets tell a very different story.
The upward swing in some “hard” assets this year is undeniable. The 50% spike in gold and even more eye-watering gains in other precious metals, such as silver and platinum suggest investors are getting anxious about something.
Many have argued that this “something” is debasement – the fear that an oncoming inflationary storm could erode the dollar’s purchasing power and the value of U.S. financial assets.
The term “debasement trade” was coined earlier this year by analysts at JPMorgan, though they began flagging the idea last October, arguing that a Republican sweep of the White House and both houses of Congress would be bullish for gold and bitcoin due to expansionary fiscal policy.
Fast forward to today, and debasement doomsayers are pointing to increased U.S. government borrowing and rising public debt projections as well as the resumption of Federal Reserve interest rate cuts at a time when inflation is about to enter its sixth consecutive year above the Fed’s 2% target.
But if we were primarily dealing with debasement fears, the dollar and U.S. bonds would be tumbling and Treasury yields would be spiking – and this isn’t happening.
WHAT DEBASEMENT?
The numbers speak for themselves. The 10-year nominal Treasury yield last week broke below 4.00%, its lowest since April. In fact, Friday’s 3.93% was the lowest in over a year if excluding April 4 and 7, the depths of post-“Liberation Day” tariff turmoil.
The benchmark 10-year yield is down nearly 60 basis points this year. Even the 30-year yield, which is much more sensitive to the de-anchoring of long-term inflation expectations, has fallen around 20 basis points this year, hardly a sign investors are running for the hills.
It’s a similar story in “TIPS”. The break-even inflation rate on 10-year TIPS, essentially an estimate of where bond investors see inflation a decade from now, last week fell to 2.275%, the lowest since June. More significantly, the 30-year TIPS break-even inflation rate fell to 2.21%, the lowest since May.
True, the dollar had its worst start to a year on record in the first half of 2025, but it has been remarkably stable since April, with the dollar index ending last week almost exactly at its six-month average. Moreover, the dollar has significantly outperformed its G10 currency peers over the past month, as Rabobank’s Jane Foley points out.
“Debasement would imply a move away from the dollar and U.S. Treasuries into assets such as gold, and there is very little evidence to back up these flows,” Foley says.
To be sure, the dollar is being viewed more skeptically by investors than it was before U.S. President Donald Trump returned to the White House, likely because the world sees the United States as a less reliable economic partner. This is reflected in the fact that as much as 80% of portfolio inflows into the U.S. are now currency hedged, according to UniCredit estimates.
All this suggests that investors still want to hitch their wagon to the U.S. economy and stock market, but not the dollar.
DESPERATELY SEEKING CLARITY
Fears of fiat currency debasement are nothing new, especially those involving the dollar. But they have gained traction since the huge monetary and fiscal responses to the 2007-2009 global financial crisis and the pandemic of 2020-2021. And Trump’s unorthodox policy agenda has only added fuel to the fire.
But given how markets are actually behaving, what we may truly be seeing is a mix of central bank diversification, private sector portfolio reallocations, or simply momentum-driven buying.
Ultimately then, we may be reaching peak “debasement trade”. Like other popular terms this year, such as the infamous “TACO” (Trump Always Chickens Out) trade – the “debasement trade” is essentially a simple narrative that can help investors make sense of an increasingly logic-defying world.
Even though the $4 trillion global crypto market and $28 trillion gold market may be emitting dollar debasement warnings, the $28 trillion Treasury market and nearly $10 trillion-a-day currency market are not. If you want a simple answer to what’s happening in today’s financial world, keep looking.
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever;)
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