A link between yen pressure and Treasuries pressure is there. There is a clear impulse running from the recent Japanese yen intervention saga to interest rate markets. We assert that prior JPY weakness is a manifestation of tension stemming from an uber-cautious Bank of Japan and a policy rate that remains too low. On our updated calculations, the Japanese policy rate today is some 50bp below neutrality as measured from our estimate of the interest rate buffer vis-à-vis the Federal Reserve.
The tension stemming from this is reflected in a super weak yen and very elevated long-dated Japanese government bond yields, with the 30yr yield in the 4% area. This tension can be eased through rate hikes, and the sooner, the better. The second impulse revolves around the recent intervention that saw Japan and the US engage in co-ordinated action to strengthen the yen. It's quite probable, behind the scenes, that Treasury Secretary Bessent voiced an expectation that the Bank of Japan tightens policy as a support to the intervention.
The Treasury Secretary chose to sell euros to buy the yen, which is unusual, as typically the trade would have been to sell the US dollar. While there has been no clear rationale offered for this, it is possible that the Treasury Secretary simply preferred not to engage in a trade that would manifest in the selling of US Treasuries. Ahead, we need to keep a close eye on these circumstances. It seems that the yen is intent on testing 160 versus the US dollar again, as it continues to creep in that direction.
Important to monitor whether and to what extent there is a negative feedback loop into US Treasuries as further intervention is entertained. If the US Treasury were again to sell euros, could the European Central Bank, for example, choose to balance the trade by selling US dollars, and by extension, US Treasuries? On top of all that, the July US fiscal numbers were not great and can independently pressure Treasuries. Meanwhile, the ratchet higher in longer-dated real yields since February is a feature that we're not expecting to see unwound any time soon.
With this week, markets have passed the first set of data tests for their Fed assessment. Until we get to the next jobs and inflation data ahead of the September Fed meeting, other data are likely to play only a secondary role. The US releases this Friday are the July retail sales numbers as well as the University of Michigan consumer sentiment index. Out of the eurozone we will get the second Q2 GDP reading as well as June’s trade balance. On the ratings front, Fitch has pencilled in a possible review of the UK’s AA-/Stable rating and Moody’s will look at Austria’s Aa1/Negative rating.
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