Pushed the yen higher, but failed to defend US Treasuries—Is Bessent the stock market's "worst teammate"?

Source: Wall Street Journal

U.S. Treasury Secretary Bessent made consecutive moves this week: first, he loudly warned the market against shorting the yen, and the yen promptly strengthened; then he sharply expanded the scale of U.S. Treasury buybacks in an attempt to hold down long-end yields. The result: the yen rose, but Treasuries fell.

Viewed separately, each move has its own logic. Together, however, they constitute a dual threat to the nearly four-year bull market in U.S. equities—a stronger yen disrupts carry trades, while rising Treasury yields suppress valuations.

On Wednesday, September 9, U.S. stocks fell for a third consecutive day. The Dow dropped more than 400 points, or 0.8%; the S&P 500 fell 0.5%; and the Nasdaq declined 0.6%. AI tech stocks bore the brunt.

Treasury Buybacks: A "Pea Shooter" the Market Won't Buy

On Wednesday, the U.S. Treasury announced it would raise the cap on single long-term Treasury buybacks to $6 billion, triple 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 at one point expected the single-operation cap to reach $8 billion to $10 billion. Once the $6 billion figure came out, Treasury yields rose rather than fell.

The 10-year Treasury yield touched 4.836% intraday, the highest since October 2023. The 30-year Treasury yield stood at 5.285%, approaching the two-decade peak of 5.30% touched last month.

Elias Haddad of Brown Brothers Harriman & Co. put it bluntly: "For now, the Treasury is bringing 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.

Dustin Reid, chief fixed-income strategist at Mackenzie Investments, said: "How they manage this situation is still at an early stage. The Treasury certainly won't be too pleased with the market's reaction today."

Bessent Himself Admits: He Can't Control the "Equilibrium" Price

Facing the market's strong reaction, Bessent acknowledged on Tuesday at an event in Texas that he cannot change the "equilibrium" price of Treasuries, and that his goal is only to slow the pace of price swings and prevent harmful narratives from becoming entrenched and spreading.

He attributed the rapid climb in long-end rates to market panic over "the U.S. being unable to repay its debt," calling such concerns "absurd, but at one point 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, lower energy prices, reduced Fed policy uncertainty, fiscal consolidation, or a contraction in corporate bond issuance.

The current reality is: none of these conditions are in place. High oil prices continue to push up inflation expectations, and the market is now pricing a 62% probability that the Fed will hike rates at next week's FOMC meeting. Corporate bond issuance is also at a seasonal peak this week, with 18 borrowers issuing debt on Tuesday, the third-busiest day of the year.

"I'm the Market Maker"—The Yen Was Talked Up, But at What Cost?

Just one day before the Treasury buyback hit a wall, Bessent issued a stern warning to traders shorting the yen at the same Texas event.

According to Bloomberg, he said: "I'm the market maker 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 stems from two things: first, Bessent says he has insight into the direction of Japanese policymaking; 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 U.S. stocks.

The Yen Rose, and the "Time Bomb" of Carry Trades Began Ticking

The yen has long been the world's cheapest funding currency. The typical carry trade logic is: borrow low-interest yen, convert it into dollars, and then buy high-yielding assets such as U.S. tech stocks.

A stronger yen means the cost of this trade rises, and holders face pressure to unwind positions.

Steve Sosnick, chief strategist at Interactive Brokers, said the yen's current upward momentum "is already enough to rattle some people who borrowed yen to make leveraged bets on high-flying U.S. stocks."

Rich Privorotsky, head of Goldman Sachs' Delta-One business, also pointed out that no matter how one interprets Bessent's remarks, "the yen is objectively continuing to appreciate, and the market is betting on BOJ tightening and capital repatriation."

He further raised a key question: "What happens when yen carry trades unwind and capital flows back into Japanese bonds and stocks?"

His assessment: "The S&P and large-cap stocks in general feel inexplicably heavy, with no obvious fundamental reason. What's worth noting is that some leveraged and carry positions may be quietly bleeding 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 troubling Bessent's policy logic.

According to MarketWatch, Japan's holdings of foreign securities fell by nearly $88 billion at the end of August. Japan has long been a major holder of U.S. Treasuries.

GammaRoad's Rizzuto noted that if Japan has recently been selling U.S. Treasury assets, this deserves close attention—because it comes just after the U.S. jointly intervened with Japan in the currency market to support the yen. "It makes you feel the weight of these two things," he said.

The Treasury wants the yen strong enough that Japan does not need to sell U.S. Treasuries to raise funds. But if the yen rises too sharply and carry trades unwind on a large scale, the blow to U.S. tech stocks will be even more direct.

Traders are already privately speculating in the market: Has Bessent gotten the causality backwards—he hopes to ease pressure on long-end U.S. Treasuries by pushing the yen higher, but traditionally it is interest rate differentials that drive currency flows, not the other way around.