They boosted the Yen but failed to hold U.S. Treasury bonds! Is Basent a "weak teammate" for U.S. stocks?

U.S. Treasury Secretary Bessent took action twice this week: first, he issued a high-profile warning to the market not to short the yen, causing the yen to strengthen immediately; then he dramatically expanded the scale of U.S. Treasury buybacks, attempting to suppress long-term yields. The result was a rise in the yen, but a decline in Treasuries.

Viewed separately, both actions have their own logic. Together, however, they form a dual threat to the nearly four-year bull market in U.S. equities—the strengthening yen impacts carry trades, and rising U.S. Treasury yields dampen valuations.

On Wednesday, September 9, U.S. stocks fell for the third consecutive day. The Dow dropped more than 400 points, a decline of 0.8%; the S&P 500 fell 0.5%; and the Nasdaq dropped 0.6%. AI tech stocks were hit hardest.

Treasury Buybacks as “Peashooters,” the Market Isn’t Buying It

On Wednesday, the U.S. Treasury announced that it would raise the cap for single long-term Treasury buyback operations to $600 million, three times the original planned amount from last month.

But the market’s response was: disappointment.

Previously, Bessent had openly hinted that buyback operations could exceed $400 million, and Wall Street once expected the limit for single operations could reach $800 million to $1 billion. When the $600 million number was released, Treasury yields rose instead of falling.

The 10-year Treasury yield touched 4.836% during trading, the highest since October 2023. The 30-year yield was at 5.285%, near the two-decade peak of 5.30% reached last month.

Elias Haddad of Brown Brothers Harriman & Co. put it bluntly: “At the moment, the Treasury is bringing a peashooter to a tank fight.”

Deutsche Bank strategist Steven Zeng also commented: “It’s like the Treasury has created a monster that now has to be constantly fed.” He pointed out that the $600 million announcement failed to deliver the “shock effect” investors hoped for.

Later on Wednesday, the Treasury auctioned $3.9 billion of 10-year bonds at a yield of 4.834%, the highest yield on record for this maturity.

Dustin Reid, Head of Fixed Income Strategy at Mackenzie Investments, said: “How they’re going to manage this situation, we’re still in the early stages. The Treasury is certainly not going to be satisfied with today’s market reaction.”

Bessent Admits: He Can’t Control the “Equilibrium” Price

Facing the market’s strong reaction, Bessent acknowledged at an event in Texas on Tuesday that he cannot change the “equilibrium” price of Treasuries and that his goal is only to slow price volatility and prevent harmful narratives from taking hold and spreading.

He attributed the rapid rise in long-term rates to market panic about a “U.S. inability to repay debt,” calling such concerns “absurd, but it became the dominant narrative for a while.”

Wells Fargo macro strategists Angelo Manolatos and Francis Brown noted in their report, “Other catalysts are needed to push long-end yields lower,” including slower growth and inflation, falling energy prices, decreased Fed policy uncertainty, fiscal tightening, or a reduced supply of corporate bonds.

The current reality: none of these conditions are present. High oil prices continue to drive up inflation expectations, and the market is pricing a 62% probability of a Fed rate hike at next week’s FOMC meeting. Corporate bond issuance is also seasonally high this week, with 18 issuers selling debt on Tuesday, the third busiest day of the year.

“I’m the House”—The Yen Was Pushed Up, But At What Cost?

Just the day before the Treasury’s buyback misstep, Bessent issued a tough warning to traders shorting the yen at the same Texas event.

According to Bloomberg, he said: “I’m the house right now, so when we intervene on the yen, I know exactly what the Japanese, the Bank of Japan, and Japanese policymakers are going to do. If you want to bet against me, go ahead.”

This confidence comes from two sources: first, Bessent claims to have insight into Japanese policymakers’ actions; second, reports suggest the Bank of Japan is inclined to hike the benchmark interest rate by 25 basis points this month.

The yen extended its gains on Wednesday, reaching 153.49 yen per dollar during trading, having already hit its strongest level since February the day before.

But the problem is: A stronger yen is not necessarily good news for U.S. equities.

Yen Rises, and the Carry Trade “Time Bomb” Starts Ticking

For a long time, the yen has been the world’s cheapest funding currency. The typical carry trade logic is: borrow low-interest yen, convert to U.S. dollars, and buy high-yielding U.S. tech stocks or other assets.

A stronger yen means higher costs for this trade, and those holding positions face pressure to close them out.

Steve Sosnick, Chief Strategist at Interactive Brokers, said that the current rally in the yen “is already enough to shake some leveraged bettors who have borrowed yen to make bullish bets on soaring U.S. stocks.”

Goldman Sachs Delta-One business head Rich Privorotsky also noted that whatever one thinks of Bessent’s remarks, “the yen is objectively continuing to strengthen, and the market is betting on Bank of Japan tightening and capital repatriation.”

He further raised a key question: “What happens when yen carry trades unwind, and capital flows back to Japanese bonds and stocks?”

His view: “The S&P and large-cap stocks overall feel oddly heavy, without a clear fundamental reason. It’s worth noting that some leveraged and carry trade positions may be quietly leaking out of the system.”

GammaRoad Capital Partners CIO Jordan Rizzuto was direct: “This is the biggest risk facing the bull market.”

Bessent’s Dilemma: The Yen Can’t Be Too Weak or Too Strong

There’s an inherent contradiction here, one that is troubling Bessent’s policy logic.

According to MarketWatch, Japanese holdings of foreign securities fell by nearly $88 billion at the end of August. Japan has long been an important holder of U.S. Treasuries.

GammaRoad’s Rizzuto pointed out that if Japan has recently been selling Treasuries, this is highly noteworthy—because it happened just after the U.S. and Japan intervened in the forex market to support the yen. “This shows just how important both these actions are,” he said.

The Treasury wants the yen to be strong enough so Japan doesn’t have to sell Treasuries to raise cash. But if the yen rises too much, the mass unwinding of carry trades will have a more direct impact on U.S. tech stocks.

Some traders in the market are privately questioning whether Bessent has confused cause and effect—he hopes to ease pressure on long-term U.S. Treasuries by pushing up the yen, but traditionally, rate differentials move exchange rates, not the other way around.