Stephen Coltman, Head of Macro at 21Shares, said the Federal Reserve may tolerate elevated inflation over the long run to maintain stability of government bond markets, putting dollar debasement and Bitcoin (CRYPTO: BTC) back in the spotlight.

The ‘Debasement Trade’ Bet

Coltman, in a note shared with Benzinga, highlighted a growing market tension: the Fed hikes rates while the Treasury simultaneously announces bond purchases to push yields lower.

On Thursday, the 10-year Treasury yield climbed to 5.34%, marking its highest level since 2002. Similarly, the returns on the 30-year Treasury note rose to a 24-year high of 5.63%.

When interest rates rise, the government pays more interest on its debt. To cover this, it borrows more, which expands the budget deficit. The U.S. federal budget deficit for fiscal year 2026 has already hit $1.97 trillion.

Coltman said that if yields continue to rise, the Fed would be “forced to choose” between its “inflation mandate” and its responsibility to maintain “orderly functioning” of the debt markets, with “historical precedent” suggesting the central bank would prioritize the latter.

“The debasement trade is therefore a bet that the central bank will end up tolerating higher inflation over the long term to accommodate structural growth in government spending and rising debt levels,” he added.

Bitcoin Vs. Yields and Dollar

Notably, Bitcoin surged from around $58,000 over the summer to a September peak of $87,000. The Treasury’s announcement in August to double its debt buybacks sent yields and the dollar lower, prompting renewed interest in Bitcoin as a hedge against debasement.

However, as yields climbed to multi-year highs, Bitcoin’s rally stalled.

Data from TradingView highlights Bitcoin’s somewhat negative correlation with the 10-year Treasury yields and the U.S. Dollar Index. 

Bitcoin’s ‘Unique’ Place in the Conversation

Chris Kline, COO & Co-Founder at BitcoinIRA, said he’s focusing more on the “macro plumbing” than on cryptocurrency headlines in the near term, while pointing to the same “tension” noted earlier.

“If persistent Treasury stress ultimately increases pressure on policymakers to manage liquidity or the debt burden, it can also reinforce the longer-term argument for scarce assets,” Kline told Benzinga.

Kline pointed out that the real question many investors are still asking is: “What do I want to own when governments carry enormous debt loads and the purchasing power of fiat currency is under pressure?”

“That’s where Bitcoin continues to have a unique place in the conversation,” he added.

Price Action: As of this writing, BTC is up 1% in the last 24 hours to $83,513, according to Benzinga Pro. 

Photo Courtesy: Stephen Coltman