US Treasury Secretary Bessent made consecutive moves this week: first, he loudly warned the market not to short the yen, and the yen strengthened immediately; then he sharply expanded US Treasury buybacks in an attempt to suppress long-end yields. As a result, the yen rose, but US Treasuries fell.
Viewed separately, each move has its own logic. Taken together, however, they pose a dual threat to the nearly four-year bull market in US stocks—a stronger yen hits carry trades, while rising US Treasury yields pressure valuations.
On Wednesday, September 9, US stocks fell for a third consecutive day. The Dow dropped more than 400 points, or 0.8%; the S&P 500 fell 0.5%; the Nasdaq fell 0.6%. AI tech stocks bore the brunt.
Treasury buybacks: a 'pea shooter,' and the market isn't buying it
On Wednesday, the US Treasury announced it would raise the cap on single long-term Treasury buybacks to $6 billion, tripling the scale originally planned last month.
But the market's reaction was disappointment.
Bessent had previously publicly hinted that the buyback scale could exceed $4 billion, and Wall Street had once expected the single-operation cap to reach $8 billion to $10 billion. Once the $6 billion figure came out, US Treasury yields rose instead of falling.
The 10-year US Treasury yield touched 4.836% intraday, the highest since October 2023. The 30-year US Treasury yield stood at 5.285%, approaching the 20-year peak of 5.30% touched last month.
Elias Haddad of Brown Brothers Harriman & Co. put it bluntly: "For now, the Treasury has brought a pea shooter to a tank battle."
Deutsche Bank strategist Steven Zeng also said: "It's like the Treasury created a monster and now has to keep feeding it." He noted that the $6 billion announcement failed to deliver the "shock and awe" investors had expected.
Later on Wednesday, the Treasury auctioned $39 billion of 10-year notes at a yield of 4.834%, the highest yield on record for an auction of that maturity.
Mackenzie Investments Chief Fixed Income Strategist Dustin Reid said: "How they manage this situation is still at an early stage. The Treasury will certainly not be too pleased with today's market reaction."
Bessent himself admitted: Can't control the "equilibrium" price
Facing the strong market reaction, Bessent acknowledged at an event in Texas on Tuesday that he cannot change the "equilibrium" price of Treasuries, and his goal is only to slow the pace of price volatility and prevent harmful narratives from solidifying and spreading.
He attributed the rapid rise in long-end yields to market panic over "US insolvency," calling such concerns "absurd, but at one point it became the dominant narrative."
Wells Fargo macro strategists Angelo Manolatos and Francis Brown noted in a research report that "other catalysts are still needed to push long-end yields lower," including slower growth and inflation, declining energy prices, reduced Fed policy uncertainty, fiscal consolidation, or a contraction in corporate bond issuance.
The current reality is: none of these conditions are present. High oil prices continue to push up inflation expectations, and the market is currently pricing 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 borrowers issuing debt on Tuesday, the third busiest trading day of the year.
"I'm the house" — Yen was talked up, but at what cost?
Just one day before the Treasury buyback hit a wall, Bessent issued a strong warning to traders shorting the yen at the same Texas event.
According to Bloomberg, he said: "I'm the house now, so when we intervene in 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 right ahead."
The confidence behind these remarks comes from two sources: first, Bessent claims to have knowledge of Japanese policy movements; second, according to reports, the Bank of Japan is inclined to raise its benchmark rate by 25 basis points this month.
The yen extended its gains on Wednesday, touching 153.49 yen per dollar intraday, after hitting its strongest level since February the previous day.
But the problem is: a stronger yen is not good news for US stocks.
Yen rises, the "time bomb" of carry trades starts ticking
The yen has long been the world's cheapest funding currency. The typical carry trade logic is: borrow low-interest yen, convert to dollars, then buy high-yield assets such as US tech stocks.
A stronger yen means the cost of this trade is rising, and position holders face pressure to unwind.
Steve Sosnick, Chief Strategist at Interactive Brokers, said the yen's current upward momentum "is already enough to shake some people who borrowed yen to make leveraged bets on high-flying US stocks."
Rich Privorotsky, head of Goldman Sachs' Delta-One business, also noted that regardless of how one views Bessent's rhetoric, "the yen is objectively continuing to appreciate, and the market is betting on BOJ policy tightening and capital repatriation."
He further raised a key question: "What happens when the yen carry trade unwinds and capital flows back into Japanese bonds and equities?"
His assessment: "The S&P and large-cap stocks overall feel inexplicably heavy, with no obvious fundamental reason. It's worth noting that some leveraged and carry positions may be quietly diffusing out of the system."
Jordan Rizzuto, Chief Investment Officer at GammaRoad Capital Partners, put it bluntly: "This is the biggest risk facing the bull market."
Bessent's Dilemma: The Yen Can't Be Too Weak, Nor Too Strong
There is an inherent contradiction here that is plaguing Bessent's policy logic.
According to MarketWatch, the scale of foreign securities held by Japan fell by nearly $88 billion at the end of August. Japan has long been a major holder of US Treasuries.
Rizzuto of GammaRoad noted that if Japan has recently been selling US Treasury assets, this deserves close attention—because it comes right after the US joined forces with Japan to intervene in the currency market to support the yen. "It gives you a sense of the weight of these two things," he said.
The Treasury wants the yen strong enough that Japan doesn't need to sell US Treasuries to raise funds. But if the yen rises too sharply and the carry trade unwinds on a large scale, the impact on US tech stocks will be more direct.
Traders in the market have already been privately discussing: whether Bessent has gotten the causality backwards—he hopes to ease pressure on long-end US Treasuries by pushing the yen higher, but traditionally it is interest rate differentials that drive currency flows, not the other way around.
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