Japan's latest move to stabilize the yen is having a big and potentially troubling impact on Treasury markets.
The 3.3% surge in the yen, when priced against the dollar, suggests an intervention that could hit nearly $53 billion. Japan is trying to balance its rising debt costs with its terminally weaker currency; the Ministry of Finance hasn't commented publicly.
The yen was last marked at 159.5 against the greenback, down 2.7% from the multidecade highs it reached earlier this week.
And the move triggered a spike in Treasury bond yields. On Friday, the 1o-year rose more than 9 basis points to 4.735%, the highest level since 2023.
"Japan will be selling Treasuries to get its hands on the dollars, that it then sells, to buy its own currency in the vain hope that this will stop the Yen from falling," said Robin Brooks, senior fellow in economic studies at the Brookings Institution.
Japan's intervention came during a long slump for the yen -- now at a 40-plus-year low against the dollar. And the move flies in the face of the Bank of Japan, which has kept interest rates at their highest levels since 1995 but hinted at hikes to hold down inflation and energy costs in the world's fourth-largest economy.
"At a time when there's already lots of stress in government bond markets globally, Japan's debt dysfunction is spilling over into global markets in the form of higher Treasury yields," he added.
Brooks argues that the Bank of Japan's practice of buying government bonds, in its decadeslong aim of keeping rates low to stimulate growth, has squeezed the yen even more.
That's led to several currency interventions that have cost Japan more than $125 billion but haven't done much to help the yen.
"This is government dysfunction at its finest," Brooks said.
The moves in Treasuries, however, are worrying on their own, given that bond traders are still caught in the tight-lipped trap set by Federal Reserve Chairman Kevin Warsh, who has stood firm that he won't talk about the central bank's next rate move.
That's left the bond market to step in. The gap between 2-year yield, which is lower, and longer-dated bond yields, which are rising, expanded after Wednesday's Fed meeting since the mid-1990s.
On Friday, in fact, benchmark 30-year bonds, reached a new cycle high of 5.265% -- a level not seen since the financial crisis started in 2007.
Japan's latest intervention, reported Japan's Nikkei Business Daily, also involved a so-called 'rate check' from the New York Fed, a form of 'soft intervention' where dealers are asked to quote their currency exchange rates.
Jonas Goltermann, chief market economist at Capital Economics, called that "a new and significant development."
"Combined with the sudden dollar negativity after Fed Chair Warsh's muddled press conference, that makes this round of intervention somewhat different in nature," he said.
"Renewed worries around U.S. policy credibility would also improve the odds that this effort has more lasting effects than the short-lived impact of the last intervention round in late April," Goltermann added.
U.S. bond markets will hope this is true.
Japan is the biggest foreign holder Treasuries -- just over $1.4 trillion.
More yen interventions, paired with Treasury sales to fund them, could add the kind of upward pressure on yields that would take the 10-year closer to 5% by year's end.
That puts a renewed market focus on the rate moves by Japan's central bank.
"With the prospect of Prime Minister Sanae Takaichi replacing departing BoJ members with more dovish policymakers, the risks may be tilted toward downside revisions and delayed rate hikes," said Charalampos Pissouros, senior market analyst at Trading Point XM.
Bond markets are already dealing with higher debt and deficits, faster inflation, and the Fed.
The added uncertainty from Japan, heading into a crucial autumn stretch of rate meetings, data, and new fiscal projections, is the last thing it needs.
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