Bloomberg reported on the 9th that Treasury Secretary Scott Besant and the Treasury Department are signaling to the market that they want to prevent long-term U.S. Treasury yields from rising through a recent series of measures. Bloomberg noted that this perception is spreading among Wall Street traders and market strategists, citing factors supporting this view such as the Treasury Department’s recent intervention to boost the value of the yen, indications of a reduction in long-term bond issuance, and Secretary Besant’s remarks defending the U.S. Federal Reserve (Fed) under Kevin Warsh. Regarding the recent joint intervention by U.S. and Japanese foreign exchange authorities to boost the yen, Bloomberg assessed that it is “interpreted as a measure to reduce the risk that Japan might sell off U.S. Treasuries in large quantities to secure the dollars needed to defend its currency.”
Previously, since the 31st of last month, U.S. and Japanese foreign exchange authorities have intervened in the foreign exchange market by jointly selling dollars and buying yen to boost the value of the yen. Secretary Besant also called for an expansion of the limits on the Federal Reserve’s crisis response liquidity supply facility, the “Foreign Institutions and Monetary Authority of America (FIMA) Repurchase Agreement (Repo) Facility,” to allow Japanese foreign exchange authorities to secure dollars for market intervention without selling U.S. Treasuries. Bloomberg reported that the market interprets the subtle changes made by the U.S. Treasury Department in its quarterly report on bond issuance plans last week as a signal that the department may reduce the issuance of long-term bonds.
In a statement released alongside last week’s quarterly report, the Treasury Department used the phrase “potential changes” instead of the previously used “potential increases.” Bloomberg stated, “Bond investors interpreted this change as suggesting the possibility of reducing the volume of long-term bond issuance.” This implies that the Treasury sent a signal to the market in advance that it is willing to cut the volume of long-term bonds to lower yields, amidst record-high U.S. long-term bond yields. Since bond yields move inversely to bond prices, a decrease in the volume of bond issuance (supply) can reduce upward pressure on interest rates (downward pressure on bond prices).
The yield on 30-year U.S. Treasury bonds, which serves as a benchmark for U.S. mortgages, rose to 5.28% on the 31st of last month, marking its highest level in 19 years since July 2007. Further increases in long-term Treasury yields could increase the political burden on President Trump and the Republican Party ahead of the upcoming November midterm elections.
Bloomberg reported that Secretary Besant’s recent public defense of Fed Chair Wash, following the triggering of a surge in bond yields via a press conference about ten days ago, is one of the efforts to prevent further interest rate increases. Earlier, Chair Wash reiterated the principle of responding to price stability during a press conference following the Federal Open Market Committee (FOMC) meeting on the 29th of last month. However, he disappointed the market by failing to provide clues regarding specific methodologies or action plans, which led to a sharp rise in long-term Treasury yields.
In response, Secretary Besant appeared on CNBC on the 5th to support Chair Wash, stating that the market needs a “detox” from the Fed’s remarks regarding monetary policy. Bloomberg reported that while Secretary Besant and the Treasury Department are mobilizing various measures to defend against rising long-term bond yields, some market experts believe the impact of these measures on the market may be limited.
Peter Boockvar, Chief Investment Officer at OnePoint BFG, assessed the Treasury’s intervention in the foreign exchange market, stating, “It appears that the vulnerability of the U.S. Treasury market has reached its peak due to rising long-term rates, leading to a situation where overseas holders are advised not to sell.” Phoebe White, Head of U.S. Interest Rate Strategy at UBS, also noted that the recent Treasury measures may have only a limited impact. However, regarding the series of measures, he assessed that “it demonstrates that the Treasury will mobilize every available means if there is anything it can do to prevent further increases in long-term government bond yields.”