IOSG: US Debt, AI, Inflation Can't Coexist—Which Way Will BTC Bet?

Author｜Momir @ IOSG
 

Core view: Washington will likely protect the Treasury market and the AI cycle, tolerate higher inflation, and favor gold and BTC.

Long-term Treasury yields are key: the 10-year is around 4.70%, the 30-year near 5.23%, close to 20-year highs, driven by inflation, supply, thin marginal buyers, and competition for capital from AI infrastructure. Fiscal buybacks are unlikely to solve the root problem.

• Catalysts for Treasury pressure: the Iran war pushes up oil prices and spending expectations; AI capital demand is huge, and cloud providers issuing debt adds new long-duration supply, equivalent to up to $360 billion in 10-year duration.
• The US faces a trilemma: controlling inflation, fiscal sustainability, and growth—inflation is most likely to be sacrificed.
• Treasury Secretary's response: defending the yen, buying back the long end, issuing short-term bills—similar to "stealth QE," potentially igniting a devaluation trade.
• Gold has risen about 90%, driven by declining trust in the dollar and devaluation logic.
• Bitcoin has recently outperformed gold (weekly gain 22.2% vs 5.9%); if seen as a stealth QE trade, the tailwind could continue.

Why Treasuries Are Under Pressure

The Iran war is a catalyst on several levels:

• It pushes up oil prices, intensifies cost pressures, and may suppress real growth and tax revenues.
• It raises spending expectations: gaps in military supplies are exposed, and adapting to new forms of warfare requires investment.

AI is a catalyst, but in a completely different way:

• Massive investment boosts economic growth and short-term inflation. Overall, this is positive because it increases the likelihood of "growing out of the debt ratio."
• But on the other hand, these investments have an enormous appetite for capital, and that demand has begun to spill into the bond market. Hyperscale cloud providers with healthy balance sheets are now competing with the Treasury for money in maturity segments previously dominated by the government.

The Bank for International Settlements estimates that total bond issuance by hyperscale cloud providers in 2025 will exceed $100 billion, mostly long-dated. A Dallas Fed analysis used roughly $300 billion to represent AI-related investment-grade issuance. After duration adjustment, this equates to up to $360 billion in 10-year equivalent duration.

So in my view, the US is facing a very difficult trilemma. And it is increasingly clear that strict inflation control is the politically easiest corner to sacrifice.

Current Treasury Secretary Bessent's Response: Defend the Treasury Market First

Bessent's recent actions show how closely he is watching the bond market.

• Defending the yen reduces the risk of Japan being forced to sell Treasuries. Japan is the largest foreign holder of US debt. When it buys yen to defend its currency, it needs dollars, and selling Treasuries is one way to get dollars—but that would amplify pressure on the Treasury market. So defending the yen also reduces the probability of Japan selling Treasuries for intervention.
• Buying back illiquid long-end bonds. Buybacks do not cancel debt. If financed by issuing new short-term bills, they change the maturity structure of government liabilities: less duration on one end, more short-term bills on the other.
• Shifting issuance to the short end is likely the next step.
• In 2023–24, Yellen's Treasury relied heavily on short-term bills when financing needs surged. Stephen Miran and Nouriel Roubini, in a 2024 paper, called this approach "activist Treasury issuance." Their argument: roughly $800 billion in bill issuance beyond the normal path removed duration from the market, with an effect similar to "stealth QE," easing financial conditions by roughly the equivalent of a one-percentage-point rate cut; they also accused the Treasury of using this to boost the Biden administration's 2024 election prospects. The likelihood of Trump's Treasury using similar operations is increasing.

If these operations proceed as expected, they could bring a significant wave of liquidity, reigniting the "currency devaluation trade."

Gold Has Already Secured a Seat

Gold's rally is not a simple inflation trade. From Aug. 1, 2024, to Aug. 24, 2026, gold rose from $2,455 per ounce to $4,664, a gain of about 90%. Drivers include: declining trust in the dollar after it was used as a policy weapon, persistent inflation concerns, and perhaps most critically: devaluation logic—expanding the money supply may be the only politically viable way out of this debt cycle.

Does Bitcoin Qualify for the "Devaluation Hedge" Category?

Not yet, but the recent move makes the question worth serious discussion.

In the previous gold-led rally, from Oct. 1, 2025, to gold's high on Jan. 29, 2026, gold rose 39.6%, while Bitcoin fell 30.4%. For an asset marketed as "digital gold," that performance was ugly.

Recent price action is different. From Aug. 18 to 24, Bitcoin rose 22.2%, gold 5.9%. This move accelerated after the Treasury stepped up long-end buybacks. But the same week Washington was also pushing crypto legislation, so attribution is not clean. If the market treats it as a stealth QE trade rather than a pure devaluation trade, Bitcoin's outperformance makes sense and is more likely to continue: when global liquidity eases, crypto assets tend to react strongly.

Conclusion, and What Could Overturn It

This trilemma does not mean inflation will definitely spiral out of control or that formal yield curve control is imminent. It is just a framework for seeing where the constraints really bind.

If inflation remains above target, the deficit stays around 6% of GDP, and AI-related borrowers keep adding long-duration supply, then the cost of simultaneously preserving Treasury market stability and the growth cycle will increasingly manifest as: shorter debt maturities, normalized liquidity backstops, and tolerance for higher inflation risk. That is bullish for gold and BTC.

Conversely, this view would be weakened if: inflation falls back to around 2%, Congress delivers a credible fiscal path, AI infrastructure becomes self-financing, or private demand can absorb Treasury issuance without demanding higher term premiums.

So the market's next question should not be "when will the Fed cut rates," but this: which corner of the triangle will Washington let break first? If the Treasury accelerates this duration shift, Bitcoin faces a more sustained tailwind.