This week, the U.S. market experienced a rare synchronized selloff across equities, bonds, and currencies: U.S. stocks, Treasuries, and the dollar all weakened simultaneously, and the Japanese yen was not spared either. Markets are beginning to fundamentally question the effectiveness of the U.S. Treasury Department’s attempts to stabilize long-end rates through bond buybacks and supply management. Nomura Securities macro strategist Nakamatsu Naka wrote in a recent report that the so-called “Bessent put” — U.S. Treasury Secretary Scott Bessent’s effort to suppress long-end yields by expanding Treasury buybacks — is losing its effectiveness. Policy intervention has not only failed to durably stabilize the bond market but is further amplifying downward pressure on the dollar.
On Wednesday, the U.S. Treasury announced it would “at least double” the size of its 10- to 30-year Treasury buyback program, just two weeks after the previous buyback announcement. Yet the policy’s support for markets lasted less than a day: long-end Treasury yields briefly dipped before quickly rebounding, ending the week roughly flat. The market’s interpretation of the move was decidedly negative, and the dollar’s reaction was even more pronounced than that of Treasuries, weakening notably. The concern is that if the Treasury stabilizes the bond market through supply-demand adjustments, the process of “catching up to the curve” — which would otherwise require rate hikes or other tightening measures — could be further delayed, and monetary policy could consequently remain more accommodative for longer.
The Policy Dilemma Facing Japan
More concerning is that the U.S. policy path could serve as a cautionary tale for Japan. Nakamatsu warns that if Japan also suppresses long-term financing costs through bond supply management, the pressure could shift from the bond market to the currency market, ultimately manifesting as yen depreciation. If market confidence deteriorates further, it could even trigger capital outflows and risks reminiscent of the 1997 Asian Financial Crisis.
The yen remained weak this week, but Japanese equities posted the steepest decline among G3 markets, falling 3.3%, compared with declines of 1.9% in the U.S. and 1.1% in Europe. Meanwhile, 10-year U.S. Treasury yields rose 1 basis point, European government bond yields rose 5 basis points, while Japan’s 10-year JGB yield actually fell 3 basis points. This divergence partly reflects shifting market expectations about Japanese policy.
The problem is that if Japan follows the U.S. lead in suppressing JGB yields through supply-side measures such as reducing long-term bond issuance, the side effects could be released in the form of yen depreciation. Because the Bank of Japan holds close to 50% of the JGB market, its control over the bond market is actually far stronger than the Federal Reserve’s — but this also means market distortions are more likely to show up on the currency side. Even more concerning is that the yen is already a structurally weak currency, not a key reserve currency like the dollar. Nakamatsu draws a parallel between the current environment and the backdrop of the Asian currency crisis during the 1990s tech boom, noting that if Japanese policy goes off track, the risk of Japan shifting from a capital importer to a source of capital repatriation is quite high. In this context, he argues that Japan at minimum needs to explicitly signal an end to large-scale anti-inflationary policy credit — this is the minimum necessary condition for stabilizing market expectations.
Rising Rate-Hike Expectations and AI Credit Risk
This week, market pricing for the Bank of Japan’s rate-hike path firmed further: the probability of a September hike rose to roughly 80%, with markets now pricing in three additional hikes and a terminal policy rate of 1.75%. Japan’s terminal rate expectation (2-year forward OIS) also rose from 2.19% to 2.23%. The BOJ’s recent signals have indeed been hawkish, and markets are even beginning to discuss the possibility of an accelerated hiking pace.
However, Nomura Securities believes the Japanese economy still retains a degree of resilience. Deputy Governor Himino’s remarks may further reinforce expectations for a September hike, but they do not necessarily mean the BOJ will commit to a faster pace of tightening. Therefore, with the market already heavily priced, even a delivered September hike may not constitute a fresh positive catalyst.
Bessent has previously stated publicly that market concerns about inflation “do not align with fundamentals,” arguing that current inflationary pressures stem primarily from energy and are transitory in nature. This assessment may mean he is underestimating the potential impact of AI on economic growth, inflation, and the supply-demand dynamics of capital. The FOMC minutes released by the Federal Reserve this week also showed that officials remain clearly divided on whether AI-driven inflationary pressures can transmit broadly through the economy, with no consensus yet formed.
By contrast, the more pressing concern is the competition for capital between tech corporate bonds and government bonds. Credit default swap (CDS) spreads on some mega-cap tech companies have surged to record highs, reflecting growing market concern that massive AI capital expenditure is squeezing corporate financing capacity. The high capital demands of AI investment are transmitting into the credit market and competing with government bond financing for funds. While the U.S. earnings season has further validated the support that AI investment provides to corporate profits and capex, if the tech corporate bond market remains under sustained pressure, changes in financing costs and risk appetite could feed back into the equity market. As such, whether tech corporate bonds can stabilize will be a key external indicator for whether equities can hold their ground next week.
Additionally, Warsh’s remarks on balance sheet policy (QT) at the Jackson Hole Symposium also warrant attention. If he signals a continued path of balance sheet contraction and a reluctance to inject excess liquidity into financial markets, it could further tighten liquidity conditions and pressure equity markets. His long-standing wariness of excessive liquidity causing asset price distortions makes this risk particularly worth monitoring.
AloJapan.com