What Happened
TREE NEWS reports: This week, US markets experienced a rare simultaneous decline in stocks, bonds, and the dollar, with the yen also weakening. Treasury Secretary Scott Bessent’s efforts to stabilize long-term yields through expanded bond buybacks and supply management have come under scrutiny. Nomura strategist Matsuzawa Naka warns that the ‘Bessent put’—the policy backstop for lower long-term rates—is losing effectiveness, and policy intervention may be adding downward pressure on the dollar.
Market Impact
Stocks, Bonds, and Dollar Under Pressure
The US Treasury announced it would ‘at least double’ buybacks of 10- to 30-year bonds, but the market reaction lasted less than a day. Long-term yields briefly fell then rebounded, ending the week flat. The dollar weakened more sharply than Treasuries, reflecting concerns that supply-side intervention delays necessary rate hikes, keeping monetary policy looser than warranted. This ‘behind the curve’ risk is now a key market worry, as Bessent downplays inflation as ‘not fundamentals-based’ and temporary, potentially underestimating AI’s impact on growth and capital demand.
Japan: A Cautionary Tale
Matsuzawa warns that Japan risks repeating the mistakes of the US. If Japanese authorities use bond supply management to cap long-term yields, the pressure may shift to the currency, leading to yen depreciation. With the BOJ holding nearly 50% of JGBs, market distortions could manifest more in FX. The yen is already weak, and a policy misstep could turn Japan from a capital importer to a source of outflows, echoing the 1997 Asian crisis. Japan must at least signal abandonment of aggressive reflationary credit policies to stabilize expectations.
Rising BOJ Hike Odds and AI Credit Squeeze
Market pricing for BOJ rate hikes has intensified: September probability is ~80%, with three more hikes priced in to reach 1.75%. However, Nomura argues that even if September delivers, it may not be a positive catalyst given high expectations. More concerning is the competition for credit between hyperscaler AI capex and government debt. CDS spreads for major tech firms have hit historic highs, signaling funding strain. If tech corporate debt continues to weaken, it could spill over into equities. Additionally, Fed’s Waller’s comments on QT at Jackson Hole could tighten liquidity further.
Key Takeaways for Investors
- Diversify: The simultaneous sell-off in US assets underscores the need for global diversification.
- Monitor Japan: Watch for policy signals from the BOJ and Ministry of Finance; any hint of yield curve control could trigger yen volatility.
- Watch credit spreads: AI-driven corporate debt stress may be a leading indicator for equity market corrections.
- Stay nimble on rates: The ‘Bessent put’ is not reliable; expect higher volatility in long-end yields.
