Why an announcement from the Treasury sparked a rally in gold and bitcoin this week

By Christine IdzelisCryptocurrencies and precious metals shot higher, while the U.S. dollar weakened, after the Treasury Department said it planned to double its bond buybacksGold and bitcoin rallied this past week after the Treasury Department announced larger buybacks of longer-dated U.S. government bonds.The U.S. Treasury Department's buyback announcement this past week wasn't enough to calm jittery stock and bond markets. But as bond yields climbed and the U.S. dollar weakened, prices of bitcoin and gold shot higher.Bitcoin (BTCUSD), in particular, emerged as a big winner after Treasury Secretary Scott Bessent unveiled plans to intervene in the bond market with larger buybacks of longer-dated Treasurys.The Treasury Department's buyback announcement on Aug. 19 was the "main catalyst" for bitcoin's surge, said Stephen Coltman, head of macro at 21shares, in an interview Friday. The benchmark cryptocurrency's move higher was also helped by President Donald Trump's meeting at the White House with crypto-industry leaders that same day, along with optimism surrounding the proposed Clarity Act legislation that would regulate crypto assets.Debasement tradeBigger buybacks of longer-dated Treasurys came as a "shock" to the market and helped to reignite the dollar debasement trade, Coltman said.The debasement trade sees precious metals like gold (GC00) and silver (SI00) climb, along with some cryptocurrencies like bitcoin. The idea is that persistent budget deficits and inflation will continue to debase the value of the dollar, pushing investors to seek cover in hard assets like gold. Even though bitcoin is an entirely digital currency, its supply is fixed, which has helped to position it as a hedge against a weaker dollar.Many of the telltale signs were there. While bitcoin climbed alongside gold and other commodities, the U.S. dollar weakened. A weakening currency coupled with rising bond yields is often seen as a sign that investor confidence has been dented.The worry is that market interventions that keep a lid on long-dated Treasurys rates risk easing financial conditions, potentially stoking inflation in the economy, according to Coltman. That would make the U.S. dollar less attractive, with concern that investors in long-term Treasurys might not be getting enough compensation for inflation under such a scenario, he explained.As the U.S. dollar weakens, bitcoin may appear as an attractive hedge for some traders partly due to its limited supply, Coltman said. The ICE U.S. Dollar Index DXY, a measure of the greenback against other major currencies, was down 0.8% this week after slumping in the wake of the Treasury Department's buyback announcement, according to FactSet data.By contrast, bitcoin prices have jumped, seeing an unusually large move higher since the announcement, Coltman noted. The rally likely prompted traders who were short bitcoin - or positioning to profit from falling prices of the cryptocurrency - to exit those trades, he said. The unwinding of short positions would add buying pressure, helping to push up bitcoin prices.The iShares Bitcoin Trust ETF IBIT, an exchange-traded fund that tracks spot prices of bitcoin, has soared 22.6% this past week, with particularly big rallies of around 6% in each of the three days through Friday, FactSet data showed.Gold shines againGold also climbed on the week, although its rally wasn't nearly as big as bitcoin's.Truist Wealth upgraded its rating on gold to neutral on Aug. 19, after the Treasury Department's announcement. Gold benefited from the ensuing weakness in the U.S. dollar, with the yellow metal breaking above its 200-day moving average, Truist Wealth CIO Keith Lerner told MarketWatch in an interview Friday.From a technical perspective, gold's move above that key level is positive and suggests it may continue to climb, Lerner said. The yellow metal's 200-day average is around $4,518 an ounce, according to FactSet data.Meanwhile, a popular ETF that holds gold, SPDR Gold Shares GLD, attracted $1.3 billion in capital on Aug. 19, which marked its biggest daily inflow since mid-January, according to FactSet data.21shares' Coltman anticipates the bond market may test Bessent's appetite for further increasing the size of its buyback operations to stabilize long-dated Treasury rates. After all, the size of the buybacks is small, he noted, adding that the potential for even larger buybacks may make some people "nervous" about inflation.While the U.S. Treasury isn't printing money, the effect may be similar because it may issue short-term T-bills, which are like cash equivalents, to buy back longer-dated Treasurys, according to Coltman. But the government can't increase the supply of gold and bitcoin, which is part of the appeal of those assets to some traders who are looking to hedge against a falling dollar and inflation fears, he said.The Treasury Department announced on Aug. 19 that it plans to double the size of its buyback operations for longer-term Treasurys beginning Sept. 9, in order to provide "greater liquidity support" in that part of the market - including 10-to 20-year, and 20- to 30-year pockets. However, a positive reaction to the announcement in the bond market reversed course the very next day.The yield on the 10-year Treasury bond BX:TMUBMUSD10Y - a benchmark rate that influences the cost of mortgages and other loans - continued rising Friday to 4.737%, while the 30-year Treasury rate BX:TMUBMUSD30Y increased to 5.276%, according to Dow Jones Market Data. That brought rates on the securities back to around levels seen the day before the Treasury Department's buyback announcement.And that's after the 30-year Treasury yield recently climbed to its highest level since 2007 at the end of July, based on 3 p.m. Eastern time levels, while the 10-year Treasury rate on July 31 touched its highest level since January 2025, according to Dow Jones Market Data.Investors have heightened their focus on long-term Treasury yields after their recent climb, partly on concerns that such moves lift borrowing costs for consumers, companies and the U.S. government. The U.S. federal government saw its debt swell past $40 trillion this week, and interest payments on that debt now top $1 trillion annually.As bond yields and prices move in opposite directions, the U.S. fixed-income market broadly slipped this week. The Vanguard Total Bond Market ETF BND, which provides broad exposure to investment-grade bonds in the U.S. including Treasurys, saw a slight weekly decline of 0.1%.Ian Lyngen, head of U.S. rates strategy at BMO, cautioned in a note Friday that "in addition to renewed concerns about de-dollarization, U.S. creditworthiness and the need for higher term premium, there is a collective skepticism that the U.S. Treasury's buyback adjustment changes the underlying fundamental drivers of the recent bond selloff."-Christine IdzelisThis content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.