Besant loudly warned this week against shorting the yen while expanding the limit for U.S. debt buybacks to 6 billion dollars. As a result, the yen rose, but U.S. bonds fell—the yield on the 10-year hit a new high since October 2023, and the 30-year approached a twenty-year peak. Analysis indicates that the combination of a stronger yen and higher U.S. bond yields is simultaneously impacting carry trades and stock valuations, posing a dual threat to the bull market in U.S. stocks. This is "the biggest risk facing the bull market."

Written by: Long Yue, Wall Street Insight

U.S. Treasury Secretary Besant took action continuously this week: first, he loudly warned the market not to short the yen, leading to a rapid appreciation of the yen; immediately following this, he significantly expanded the scale of U.S. debt buybacks, attempting to suppress long-term yields. The result was that the yen rose, but U.S. bonds fell.

Looking at the two actions individually, each has its own logic. Together, however, they form a dual threat to the nearly four-year bull market in U.S. stocks—the stronger yen impacts carry trades, while rising U.S. bond yields pressure valuations.

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

U.S. Debt Buyback "Peashooter", Market Unconvinced

On Wednesday, the U.S. Treasury announced it would raise the single transaction limit for long-term Treasury buybacks to 6 billion dollars, tripling the previously planned size from last month.

However, the market's reaction was: disappointment.

Previously, Besant had publicly hinted that the buyback size might exceed 4 billion dollars, and Wall Street had once anticipated a single operation limit of 8 to 10 billion dollars. With the announcement of 6 billion dollars, U.S. bond yields rose instead of falling.

The yield on the 10-year U.S. bond touched 4.836% during trading, the highest since October 2023. The yield on the 30-year U.S. bond reported 5.285%, near the twenty-year peak of 5.30% reached last month.

Elias Haddad from Brown Brothers Harriman & Co. phrased it directly: "For now, the Treasury is coming to a tank battle with a pea shooter."

Deutsche Bank strategist Steven Zeng also remarked, "It's as if the Treasury created a monster it now has to keep feeding." He pointed out that the announcement of 6 billion dollars failed to deliver the "deterrent effect" that investors had hoped for.

Later on Wednesday, the Treasury auctioned 39 billion dollars of 10-year Treasury bonds at a yield of 4.834%, setting a record for the highest yield ever at that term auction.

Dustin Reid, chief fixed-income strategist at Mackenzie Investments, said, "How they manage this situation is still in the early stages. The Treasury is unlikely to be very satisfied with the market's reaction today."

Besant Acknowledges: Can't Control "Equilibrium" Price

Faced with the strong market response, Besant acknowledged on Tuesday at an event in Texas that he could not change the "equilibrium" price of U.S. bonds, and his goal was merely to slow the pace of price fluctuations and prevent harmful narratives from solidifying and spreading.

He attributed the rapid rise in long-term rates to market panic over "America's inability to repay its debts," calling this concern "absurd, but it once became a dominant narrative."

Wells Fargo macro strategists Angelo Manolatos and Francis Brown pointed out in their research report that "other catalysts are needed to drive long-term yields lower," including slowing growth and inflation, declining energy prices, reduced uncertainty over Federal Reserve policy, fiscal consolidation, or a reduction in corporate bond issuance.

The current reality is: none of these conditions are in place. High oil prices continue to drive up inflation expectations, and the market currently prices in a 62% probability of a Federal Reserve rate increase at next week's FOMC meeting. Corporate bond issuance is also at a seasonal peak this week, with 18 borrowers issuing bonds on Tuesday, making it the third busiest trading day of the year.

"I am the dealer"—the yen has risen, but at what cost?

The day before the U.S. debt buyback hit a wall, Besant issued a stern warning to traders shorting the yen at the same Texas event.

According to Bloomberg, he said: "I am the dealer now, so when we intervene in the yen, I know what the Japanese, the Bank of Japan, and the Japanese decision-makers are going to do. If you want to bet against me, go ahead."

This confidence comes from two aspects: first, Besant claimed to have insights into the movements of Japanese policymakers; second, it was reported that the Bank of Japan is inclined to raise the benchmark interest rate by 25 basis points this month.

The yen continued to rise on Wednesday, touching 153.49 yen to 1 dollar during trading, after having reached 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 Rises, the "Time Bomb" of Carry Trades Begins to Tick

For a long time, the yen has been the world's cheapest funding currency. The typical logic of carry trades is: borrow low-cost yen, convert to dollars, and then buy high-yield assets like U.S. tech stocks.

A stronger yen means the costs of these trades are rising, putting pressure on those holding positions to close them.

Interactive Brokers chief strategist Steve Sosnick stated that the current upward momentum of the yen "is enough to shake some who borrowed yen and leveraged bets on soaring U.S. stocks."

Rich Privorotsky, head of Goldman Sachs Delta-One business, also pointed out that regardless of how one views Besant's words, "the yen is objectively continuing to appreciate, and the market is betting on the Bank of Japan tightening policy and funds flowing back in."

He posed a critical question: "What happens when carry trades in yen are closed, and funds flow back to Japanese bonds and stocks?"

His judgment is: "The S&P and large-cap stocks feel inexplicably heavy, with no obvious fundamental reasons. It is worth noting that some leveraged and carry positions may be quietly dissipating from the system."

Jordan Rizzuto, chief investment officer at GammaRoad Capital Partners, commented directly: "This is the biggest risk facing the bull market."

Besant's Dilemma: The Yen Cannot Be Too Weak or Too Strong

There is an inherent contradiction troubling Besant's policy logic.

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

Rizzuto from GammaRoad pointed out that if Japan has recently been selling U.S. bond assets, this is worthy of high concern—because this occurs just after the U.S. recently intervened in the currency market alongside Japan to support the yen. "This makes you feel the weight of these two matters," he said.

The Treasury hopes the yen will be strong enough so that Japan does not need to sell U.S. bonds to raise funds. However, if the yen rises too sharply, large-scale closing of carry trades will have a more direct impact on U.S. tech stocks.

Market traders have already started to privately discuss whether Besant has reversed the cause-and-effect relationship—he hopes to relieve pressure on long-term U.S. bonds by pushing up the yen, but traditionally it is interest rate differentials that drive currency flows, not the other way around.