US Treasury Repo Comparable to Japan's YCC? The Dollar May Not Enter a "Devaluation Spiral," But the Downward Pressure Trend Cannot Be Ignored

According to Zhitong Finance APP, the US Treasury's bond buyback commitment, which caused sharp market volatility this week, has sparked comparisons with policies by Japanese authorities. In Japan, policies designed to control borrowing costs (i.e., Yield Curve Control, YCC) ultimately led to a long-term depreciation of the yen. Recently, Wall Street has also warned that the US dollar could be the biggest loser if the United States ramps up Treasury buybacks. Data shows that the dollar is currently hovering near a three-month low and is poised for its worst weekly performance this month.

Robin Brooks, Senior Fellow at the Brookings Institution, said this move by the US government is "by far the clearest signal" that the US is following Japan’s path, dealing with related issues by allowing its own currency to depreciate. He bluntly stated that the US government is “playing with fire.”

Amid persistent global pressure on long-term bonds, US Treasury Secretary Scott Besant dropped a bombshell on Wednesday—doubling the size of weekly liquidity support repurchase operations for 10 to 30-year bonds from $2 billion each to at least $4 billion. This operation quickly pushed down long-end yields—the 30-year US Treasury yield fell nearly 10 basis points to 5.18% within hours of the announcement. However, Treasuries have since trimmed some of the gains triggered by the news. At the time of writing, the 30-year Treasury yield stood at 5.26%, and the 10-year yield had returned above 4.7%.

The US Treasury’s move to increase long-term bond buybacks is putting the dollar in an awkward position. Mohit Kumar, Chief European Economist at Jefferies International, said, “Any form of yield curve control will weaken the dollar.” Gerald Gan, CIO at Singapore family office Reed Capital, said bluntly, “The dollar is undoubtedly the biggest victim.” He believes Besant is deliberately suppressing long-term real interest rates and signaling a tolerance for a weaker dollar to keep the economy running. Steven Barrow, G10 Strategy Head at Standard Bank, also warned that lowering bond yields through buybacks will only increase downward pressure on the dollar and cannot address the fundamental budget deficit driving Treasury yields higher.

However, some analysts argue there are limitations in comparing US and Japanese measures. The so-called "Abenomics"—the economic policies pursued by former Japanese Prime Minister Shinzo Abe—relied on massive monetary easing to stimulate growth. This included large-scale quantitative easing, effectively printing yen to buy government bonds and suppressing yields, forcibly driving the yen down. The US Treasury’s bond buybacks cannot be equated with such monetary stimulus, and the US has not opted to accept currency depreciation as the necessary price for keeping yields low.

Steven Barrow noted that actions taken by the US government last month to intervene and support the yen prove this point. At that time, the US used euros rather than dollars for intervention, thereby protecting the dollar. Meanwhile, since Japan did not need to sell US Treasuries to obtain the dollars needed to support the yen, US Treasury yields were also protected. However, he added: “The problem is, the US can’t have it both ways.”

Foreign exchange traders are now awaiting remarks from Federal Reserve Chair Walsh at the Jackson Hole Global Central Banking Symposium at the end of this month. If Walsh delivers hawkish comments to counter market expectations for rate cuts, the dollar may catch a breather.

Capital.com Senior Market Analyst Daniela Hathorn wrote: “How Walsh views persistent inflation, the recent rise in long-term yields, and the future size and role of the Fed’s balance sheet—any related statements could trigger massive repricing in US Treasuries, the dollar, gold, and stock markets.”

But if the Fed resists pressure to hike rates, the narrative surrounding dollar depreciation may receive further support in the market. Sentiment towards the dollar in the options market is already at its most pessimistic since February. Even as the spot price of the dollar is falling, this still suggests traders are betting the dollar may weaken further. Robin Brooks said, “Once a currency enters a depreciation spiral, stabilizing it can become extremely difficult.”