It boosted the yen but failed to protect US Treasury bonds! Is Bessenter a "pig teammate" for the US stock market?

U.S. Treasury Secretary Bessenter took a series of actions this week: first, he publicly warned the market against shorting the yen, which immediately strengthened the yen; then, he significantly expanded the scale of U.S. Treasury repurchase operations in an attempt to suppress long-term yields. As a result, the yen rose, but U.S. Treasuries fell.

Each of these two events, viewed individually, has its own logic. However, when taken together, they constitute a double threat to the nearly four-year bull market in US stocks: a stronger yen impacting carry trades, and higher US Treasury yields suppressing valuations.

On Wednesday, September 9th, U.S. stocks fell for the third consecutive day. The Dow Jones Industrial Average fell more than 400 points, a drop of 0.8%; the S&P 500 fell 0.5%; and the Nasdaq fell 0.6%. AI technology stocks were hit hardest.

US Treasury repurchase agreements, like "pea shooters," are not gaining traction in the market.

On Wednesday, the U.S. Treasury announced that it would raise the limit on a single long-term Treasury bond repurchase to $6 billion, tripling the amount originally set last month.

But the market's reaction was disappointment.

Previously, Bessant had publicly hinted that the repurchase program might exceed $4 billion, and Wall Street had expected the maximum single operation to reach $8 billion to $10 billion. However, the announcement of the $6 billion figure caused US Treasury yields to rise instead of fall.

The 10-year Treasury yield touched 4.836% during the session, its highest level since October 2023. The 30-year Treasury yield was at 5.285%, approaching the 20-year peak of 5.30% reached last month.

Elias Haddad of Brown Brothers Harriman & Co. put it bluntly: "For now, the Treasury is bringing a pea shooter to fight a tank war."

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

Later on Wednesday, the Treasury auctioned $39 billion in 10-year Treasury notes at a yield of 4.834%, setting a new record for the highest yield ever recorded at an auction of that maturity.

"It's still early days to see how they manage this situation," said Dustin Reid, chief fixed-income strategist at Mackenzie Investments. "The Treasury is certainly not happy with today's market reaction."

Bessant himself admitted that he couldn't control the "equilibrium" price.

In response to the strong market reaction, Bessant admitted at an event in Texas on Tuesday that he could not change the “equilibrium” price of Treasury bonds and that his goal was only to slow down the pace of price fluctuations and prevent harmful narratives from becoming entrenched.

He attributed the rapid rise in long-term interest rates to market panic over the “US inability to repay its debts,” calling the fear “absurd, but at one point the dominant narrative.”

In a research note, Wells Fargo macro strategists Angelo Manolatos and Francis Brown pointed out that "other catalysts are needed to push long-term yields lower," including slower growth and inflation, lower energy prices, reduced uncertainty surrounding Federal Reserve policy, fiscal consolidation, or a contraction in corporate bond issuance.

The current reality is that none of these conditions are met. High oil prices continue to push up inflation expectations, and the market is currently pricing in a 62% probability of a Fed rate hike 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 house"—the yen has gone up, but what will be the price?

Just one day before his U.S. Treasury repurchase program hit a snag, Bessant issued a strong warning to traders shorting the yen at the same event in Texas.

According to Bloomberg, he said, "I'm the house now, so when we intervene in the yen, I know exactly what the Japanese, the Bank of Japan, and the Japanese policymakers are going to do. If you want to bet against me, go ahead."

The confidence behind these remarks comes from two aspects: first, Bessant claims to be aware of the movements of Japanese policymakers; second, it has been reported that the Bank of Japan is inclined to raise the benchmark interest rate by 25 basis points this month.

The yen extended its gains on Wednesday, hitting 153.49 yen to the dollar during the session, after reaching its strongest level since February the previous day.

The problem is that a stronger yen is not good news for US stocks.

The yen has appreciated, and the "time bomb" of carry trades has begun to tick.

The Japanese yen has long been the world's cheapest funding currency. The typical carry trade logic is: borrow low-interest yen, exchange it for US dollars, and then buy high-yield assets such as US technology stocks.

A stronger yen means higher costs for this transaction, putting pressure on holders to close out their positions.

Interactive Brokers chief strategist Steve Sosnick said the yen's current upward momentum "is enough to shake some people who have borrowed yen and made leveraged bets on U.S. high-flying stocks ."

Rich Privorotsky, head of Goldman Sachs' Delta-One business, also pointed out that regardless of how one interprets Bessenter's remarks, "the yen is objectively continuing to appreciate, and the market is betting on the Bank of Japan tightening its policy and capital repatriation."

He then raised a crucial question: " What happens when yen carry trades are closed out and funds flow back into Japanese bonds and stocks? "

His assessment was: "The S&P 500 and large-cap stocks as a whole feel inexplicably heavy, without any obvious fundamental reasons. It is worth noting that some leveraged and carry trade positions may be quietly spreading out of the system."

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

Bessant's dilemma: the yen cannot be too weak, nor too strong.

There is an inherent contradiction here that is troubling Bessant's policy logic.

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

Rizzuto of GammaRoad points out that if Japan is selling US Treasury assets recently, it's something to watch closely—because it comes right after the US joined forces with Japan to intervene in the currency market and support the yen. "It makes you feel the weight of both things," he says.

The Treasury wants the yen to be strong enough so that Japan doesn't need to sell US Treasury bonds to raise funds. However, if the yen appreciates too sharply, a large-scale unwinding of carry trades would have a more direct impact on US tech stocks.

Traders in the market are already privately discussing whether Bessant has reversed cause and effect—he hopes to alleviate pressure on long-term US Treasury bonds by pushing up the yen, but traditionally it is interest rate differentials that drive exchange rate flows, not the other way around.

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