Original author: Long Yue
Source: Wall Street Journal
U.S. Treasury Secretary Bessent took consecutive actions this week: first, he publicly warned the market against shorting the yen, prompting the yen to strengthen; shortly after, he significantly expanded the scale of U.S. Treasury repurchase operations in an attempt to suppress long-term yields. The result: the yen rose, but U.S. Treasuries fell.
Individually, each of these two factors makes sense. Together, they pose a dual threat to the U.S. stock market’s four-year bull run—a stronger yen undermining carry trades, and rising U.S. Treasury yields suppressing valuations.
On Wednesday, September 9, U.S. stocks fell for the third consecutive day. The Dow Jones dropped over 400 points, or 0.8%; the S&P 500 fell 0.5%; and the Nasdaq declined 0.6%. AI tech stocks were hit hardest.
U.S. Treasury repurchase "pea shooter," market not buying in
On Wednesday, the U.S. Treasury announced an increase in the single-day long-term Treasury buyback cap to $6 billion, tripling the previously scheduled amount from last month.
But the market's reaction was: disappointment.
Previously, Bessent had publicly hinted that the buyback size could exceed $4 billion, and Wall Street had initially anticipated a single operation cap of $8 to $10 billion. Once the $6 billion figure was revealed, U.S. Treasury yields rose instead of falling.
The 10-year U.S. Treasury yield touched 4.836% intraday, the highest since October 2023. The 30-year U.S. Treasury yield stood at 5.285%, nearing last month’s two-decade high of 5.30%.
Elias Haddad of Brown Brothers Harriman & Co. put it bluntly: “For now, the Treasury is bringing a pea shooter to a tank fight.”
Deutsche Bank strategist Steven Zeng also said: “It’s like the Treasury created a monster that now must be continuously fed.” He noted that the $6 billion announcement failed to deliver the “deterrent effect” investors had anticipated.
Later Wednesday, the Treasury auctioned $39 billion in 10-year notes at a yield of 4.834%, setting a record high for this maturity at auction.
Dustin Reid, Chief Fixed Income Strategist at Mackenzie Investments, said: "It's still early days to see how they will manage this situation. The Treasury is certainly not satisfied with today's market reaction."
Bessenet himself admits: he can't control the "equilibrium" price
In response to strong market reactions, Bessent acknowledged on Tuesday at an event in Texas that he could not alter the "equilibrium" price of Treasury bonds, aiming only to slow the pace of price fluctuations and prevent harmful narratives from becoming entrenched.
He attributed the rapid rise in long-term interest rates to market panic over the "U.S. defaulting on its debt," calling this concern "absurd, but once the dominant narrative."
Macro strategists Angelo Manolatos and Francis Brown of Wells Fargo noted in their research report that “additional catalysts are needed to push long-term yields lower,” including slowing growth and inflation, lower energy prices, reduced Federal Reserve policy uncertainty, fiscal consolidation, or a contraction in corporate bond issuance.
The current reality is that none of these conditions are in place. Persistently high oil prices continue to push up inflation expectations, with the market currently pricing in a 62% probability of a Fed rate hike at next week’s FOMC meeting. Corporate bond issuance is also at its seasonal peak this week, with 18 issuers raising funds on Tuesday—the third busiest trading day of the year.
“I’m the market maker”—the yen has been pushed up, but at what cost?
The day before the U.S. Treasury repurchase failed, Bassett issued a stern warning to traders shorting the yen at the same Texas event.
According to Bloomberg, he said: "I am now the market maker, so I know exactly what the Japanese, the Bank of Japan, and Japanese policymakers will do when we intervene in the yen. Come on, try to bet against me."
This confidence stems from two factors: first, Besent claims to have insight into the Japanese policy makers' movements; second, reports indicate that the Bank of Japan is inclined to raise the benchmark interest rate by 25 basis points this month.
The yen extended its gains on Wednesday, reaching 153.49 yen per U.S. dollar during the session, following its strongest level since February the previous day.
But the problem is: a stronger yen is not good for U.S. stocks.
The yen has strengthened, and the carry trade's "time bomb" has begun to tick.
The Japanese yen has long been the world's cheapest funding currency. The typical carry trade logic is: borrow low-interest yen, convert it to U.S. dollars, and then buy high-yield assets such as U.S. tech stocks.
The strengthening of the Japanese yen means the cost of this trade has increased, putting pressure on holders to close their positions.
Steve Sosnick, Chief Strategist at Interactive Brokers, said that the current rally in the yen "has been strong enough to shake some investors who borrowed yen to leveraged bets on high-flying U.S. stocks."
Rich Privorotsky, head of Goldman Sachs' Delta-One business, also noted that regardless of how one interprets Bessent's remarks, the yen is objectively continuing to appreciate, as the market is betting on tighter Bank of Japan policy and capital repatriation.
He further raised a key question: “What happens when yen carry trades are unwound and capital flows back into Japanese bonds and stocks?”
His assessment is: "The S&P and large-cap stocks overall feel unexpectedly heavy, without any clear fundamental reasons. Notably, some leveraged and carry positions may be quietly leaking out of the system."
Jordan Rizzuto, Chief Investment Officer of GammaRoad Capital Partners, directly characterized it as: “The biggest risk facing this bull market.”
Bensent's dilemma: The yen cannot be too weak, nor too strong
There is an inherent contradiction troubling Bessent's policy logic.
According to MarketWatch, Japan's holdings of foreign securities decreased by nearly $88 billion at the end of August. Japan has long been a major holder of U.S. Treasuries.
Rizzuto of GammaRoad noted that it is highly significant if Japan has recently been selling U.S. Treasury assets—especially since this comes right after the U.S. teamed up with Japan to intervene in the forex market to support the yen. “It gives you a sense of the weight behind these two events,” he said.
The Ministry of Finance hopes the yen remains strong enough that Japan doesn’t need to sell U.S. Treasuries to raise funds. But if the yen rises too sharply, a large-scale unwinding of carry trades could directly impact U.S. tech stocks.
Traders in the market are already whispering: Has Bessent reversed causality—he hopes to alleviate pressure on long-dated U.S. Treasuries by pushing up the yen, but traditionally, interest rate differentials drive currency flows, not the other way around.
