U.S. Treasuries, AI, and Inflation: Which Side Will BTC Bet On?

Author | Momir @ IOSG

Core Judgment: Washington is likely to prioritize the stability of the Treasury market and the AI investment cycle, at the cost of allowing inflation to remain elevated for a longer period. This is a continuous tailwind for both gold and BTC: as it releases liquidity while removing duration risk from the private sector's balance sheets.

The most critical macro price today is no longer the federal funds rate, but rather the yield investors are willing to accept to hold long-term U.S. Treasuries.

As of August 24, the 10-year U.S. Treasury yield was around 4.70%, while the 30-year yield recently touched approximately 5.23%, nearing a twenty-year high. This upward movement cannot be explained by a single factor. It is the result of several forces: persistent inflation risks, continuous fiscal supply expansion, thinning marginal buying interest for longer durations, and a new competitor for funds: AI infrastructure. The result is that investors demand higher compensation to hold long-term bonds.

To suppress the long end, the Treasury Department announced it would at least double the cap on liquidity support repurchase operations. Following this news, yields briefly retreated but could not hold. This indicates that the underlying supply and inflation issues cannot be resolved by a few billion dollars in repurchases.

Why U.S. Treasuries Are Under Pressure

The Iran war acts as a catalyst on several levels: it raises oil prices, intensifies cost pressures, and may suppress actual growth and tax revenues. It elevates spending expectations: gaps in military supply have been exposed, and adapting to new forms of warfare requires investment.

AI serves as a catalyst but operates in a completely different manner: large-scale investments will boost economic growth and short-term inflation. Overall, this is a good thing as it increases the likelihood of "diluting the debt ratio through growth." However, on the flip side, these investments have a huge appetite for capital, and this demand has begun to spill over into the bond market. Healthily capitalized mega cloud providers are now competing with the Treasury for funds in previously government-dominated maturity segments.

The Bank for International Settlements estimates that by 2025, the total bond issuance from mega firms will exceed $100 billion, primarily in long maturities. An analysis from the Dallas Fed used approximately $300 billion to represent the investment-grade issuance scale related to AI. After adjusting for duration, this equates to a maximum of $360 billion in 10-year equivalent duration.

Thus, in my view, the U.S. is facing a challenging trilemma. It is becoming increasingly clear that strictly controlling inflation is the politically easiest aspect to sacrifice among the three corners.

Current U.S. Treasury Secretary Yellen's Response: First, Protect the Treasury Market

Yellen's recent actions show how closely she is monitoring the bond market.

• Support the Yen, reducing the risk of Japan being forced to sell U.S. Treasuries. Japan is the largest foreign holder of U.S. Treasuries. When it buys yen to stabilize its currency, it needs dollars, and selling Treasuries is one way to obtain dollars: but this would amplify pressure on the Treasury market. Thus, supporting the yen also lowers the probability of Japan selling Treasuries to intervene.

• Repurchase liquidity-poor long ends. A repurchase does not equate to debt cancellation. If new short-term Treasury bills are used for financing, it changes the maturity structure of government debt: reducing duration on one end while increasing short-term bills on the other.

• Shift issuance towards the short end, which is likely the next step. In 2023-24, the Treasury under Yellen heavily relied on short-term bills as financing needs surged. Stephen Miran and Nouriel Roubini referred to this approach in a 2024 paper as "aggressive Treasury issuance." Their argument is that issuing about $800 billion in short-term bills beyond the normal path has drawn duration out of the market, with effects comparable to "invisible QE," easing financial conditions roughly equivalent to a one percentage point rate cut; they also accused the Treasury of using this to bolster the Biden administration's prospects in 2024. The likelihood of Trump’s Treasury employing similar tactics is increasing.

If these actions proceed as expected, they may bring a wave of liquidity, reigniting the "currency devaluation trade."

Gold Has Secured a Seat

The recent rise in gold is not merely an inflation trade. From August 1, 2024, to August 24, 2026, the price of gold rose from $2,455 per ounce to $4,664, an increase of about 90%. The driving forces behind this include: a decline in trust in the dollar as a policy weapon, persistent inflation concerns, and perhaps most critically: a devaluation logic, expanding the money supply, which may be the only politically viable path out of this debt cycle.

Is Bitcoin Qualified to Enter the "Devaluation Hedge" Column?

Not yet, but the recent wave has made this question worth serious discussion.

In the last rally led by gold, from October 1, 2025, to the peak of gold on January 29, 2026, gold rose by 39.6%, while Bitcoin fell by 30.4%. For an asset that markets itself as "digital gold," this performance is disappointing.

Recent price behavior has changed. From August 18 to 24, Bitcoin rose by 22.2%, while gold increased by 5.9%. This surge began to accelerate after the Treasury increased long-end repurchases. However, Washington was also pushing for crypto legislation that same week, so the attribution is not purely straightforward. If the market views it as an invisible QE trade rather than a purely devaluation trade, then Bitcoin outperforming makes sense and is likely to continue: when global liquidity expands, the response of crypto assets is often strong.

Conclusion and What Possibilities Could Overturn It

This trilemma does not imply that inflation will necessarily spiral out of control, or that formal yield curve control is imminent. It is merely a framework to clarify where the constraints lie.

If inflation continues to exceed targets, deficits remain around 6% of GDP, and AI-related borrowers keep increasing long-duration supply, then the cost of simultaneously maintaining stability in the Treasury market and the growth cycle will increasingly manifest as: shorter debt maturities, normalization of liquidity backstops, and tolerance for higher inflation risks. This is favorable for both gold and BTC.

Conversely, the scenarios that would weaken this judgment are: inflation falling back to around 2%, Congress presenting a credible fiscal path, AI infrastructure becoming self-financing, or private demand absorbing interest-bearing debt issuance without requiring higher duration premiums.

Thus, the next question for the market should not be "When will the Fed cut rates?" but rather: Which corner of the triangle will Washington let go first? If the Treasury accelerates this duration shift, Bitcoin will face a more sustained tailwind ahead.

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