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The Temptation to Call the End of Inflation

John Authers Bloomberg
Date Posted:
December 12, 2022
Is Database:
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.@johnauthers reports that we may have seen a trough in global liquidity, according to data from Crossborder Capital.

The above chart by Michael Howell of Crossborder Capital shows estimates of global new liquidity. The lines indicate the three-month annualized % growth in the monetary base. Globally [red line], growth in liquidity has ticked up very slightly after dropping to its lowest level since the global financial crisis. In the major G10 economies [grey and yellow], there is a pickup from outright negative growth that has been helped by the startling fall in the US dollar in recent weeks. As many countries use dollar financing, this has the effect of easing conditions everywhere. Last week’s balance sheet data from major central banks show policy liquidity shrinking at 5.3% in local currency terms [yellow] but rising by 2.7% in US dollar terms [grey.] Thus, it is possible that a pivot away from tighter money is already under way.

“…The above chart by Michael Howell of Crossborder Capital shows estimates of global new liquidity. The lines indicate the three-month annualized % growth in the monetary base. Globally [red line], growth in liquidity has ticked up very slightly after dropping to its lowest level since the global financial crisis. In the major G10 economies [grey and yellow], there is a pickup from outright negative growth that has been helped by the startling fall in the US dollar in recent weeks. As many countries use dollar financing, this has the effect of easing conditions everywhere. Last week’s balance sheet data from major central banks show policy liquidity shrinking at 5.3% in local currency terms [yellow] but rising by 2.7% in US dollar terms [grey.] Thus, it is possible that a pivot away from tighter money is already under way…”

John Authers, “The Temptation to Call the End of Inflation,” Bloomberg, December 11, 2022, https://www.bloomberg.com/opinion/articles/2022-12-12/john-authers-calling-the-end-of-inflation-and-buying-china?sref=U3dOGIDF

The Temptation to Call the End of Inflation

Lead Us Not Into Inflation

What have we got to be afraid of? The 2022 drama of the word’s fight against the return of inflation is about to reach its final act. After the US consumer price index on Tuesday, the Federal Reserve holds its last monetary policy meeting for the year on Wednesday, to be followed the next day by the European Central Bank, Bank of England, Swiss National Bank, and Norway’s Norges Bank. Then finally, with any luck, we can all enjoy the World Cup final and send the world into mothballs for the Christmas and New Year holidays.

So where do we stand? Inflation this year far exceeded any estimate, as did the monetary policy response (at the turn of the year, fed funds futures predicted the fed funds rate would hit 0.82% after this week’s meeting; now that market is braced for 4.35%). But after the ghastly surprise of 2022, markets again are coalescing around a view that price rises will imminently come under control. That is clear if we look at implied inflation rates from the swaps market (available on the terminal), which suggest that CPI will be back below 3% by next summer:

Why might they think this? We can answer that first by reference to the broader global picture, and then by looking more closely at the nitty-gritty of central banks’ provision of liquidity to the markets. For the case that it’s reasonable to expect inflation to fall next year, consider this schematic illustration from Academy Securities’ Peter Tchir:

Don’t spend any time on the precise numbers, or the way the different factors have been weighted; this is meant as an aid to thought and conjecture rather than anything precise. Inflation had many driving factors behind it. Among the most important were: The Fed’s expansive monetary policy in 2020 and 2021 (“The Fed” above); the fiscal stimulus administered to tide companies and individuals through the pandemic (“Stimulus”); stresses on global supply chains as businesses began to reopen; the war in Ukraine; and the bubbly behavior that was fostered by the brief but dramatic boom in “disruptive” stocks and cryptocurrencies. The diagram shows Tchir’s rough estimate of how important all these factors have been since the pandemic began. At this point, his model suggests that the Ukraine conflict is the only remaining factor still pushing inflation upwards. By the middle of next year, again on a very simple model, all of the previously inflationary forces will have become deflationary. Intuitively, this model does seem reasonable. It also implies, for Tchir, that the Fed has already gone too far.

If that’s concerning, we also need to look at how far the battle to tame in inflation has come. Central banks across the world have reined in liquidity this year, and the announced policy of “quantitative tightening” implies that they have much further to go, selling bonds into the market to reduce the money in circulation. However, it looks as though this may already have come to a “pivot” point. The following chart by Michael Howell of Crossborder Capital in London shows estimates of global new liquidity:

To be precise, the lines indicate the three-month annualized percentage growth in the monetary base. Globally, growth in liquidity has ticked up very slightly after dropping to its lowest level since the global financial crisis. In the major G10 economies, there is a pickup from outright negative growth that has been helped by the startling fall in the US dollar in recent weeks. As many countries use dollar financing, this has the effect of easing conditions everywhere. Last week’s balance sheet data from major central banks show policy liquidity shrinking at 5.3% in local currency terms but rising by 2.7% in US dollar terms. Thus, it is possible that a pivot away from tighter money is already under way.

The weakening of the dollar can be viewed as a response to implicit easing by the Fed, or it might also have been driven by an increasing belief that inflation really has been licked, and that tightening will soon go into reverse. By trying to anticipate this, the foreign exchange market almost delivers some degree of easier money as a self-fulfilling prophecy. Even if the Fed has already tightened too far, then, it’s possible that markets are already working to blunt the impact on the economy next year. To quote Howell of Crossborder Capital: ‘The US Federal Reserve looks to be leading the cycle once again. Having been the first to tighten starting from around this time last year, recent data suggest that the Fed’s QT cycle is close, or even already at, its nadir. Interest rates are likely to go on rising into 2023, albeit at a slower pace as upward pressure on prices abates, but quantitative policy looks to be changing direction already. The US dollar is responding. From its recent peak levels, it has lost some 14% versus sterling, around 10% against the euro and yen, and 5% versus the renminbi. While other Central Banks may lag the Fed once again, the depreciation of the US dollar will help. Its strength during 2022 has forced EM Central Banks to tighten to underpin their own currencies and has exacerbated already strong inflationary pressures in Western economies. The positive effect is already evident in aggregate policy liquidity growth expressed in US dollar terms. This is now gently expanding having been in negative territory for the last 12 months.”

A broader question concerns the pressures that sustain longer-term inflation. Many of the big global trends driving prices higher have turned, but consumers and businesses across the world have begun to growing accustomed to rising prices. What risk does this create of a self-perpetuating cycle of rising wage demands and rising prices? That’s an imponderable question, but the continuing strength of the US labor market suggests that inflation isn’t beaten yet. Last week, brought publication of the Atlanta Federal Reserve’s Wage Tracker figures for November, which are based on census data and allow a granular look at pay increases across the US.

Average hourly earnings data from the Bureau of Labor Statistics at the beginning of this month also suggest that it’s premature to call a top on rising wages:

We’re about to receive a bombardment of new information about inflation. It will all be useful, but there are longer-term trends whose destination is unclear. Even if and when the central banks reach the point of not raising rates anymore, there will be plenty more uncertainties.

Buy China?

If there’s one almost universally popular call for 2023, it’s “buy China” — not just its bonds, but even its beleaguered stocks. On any simple what-goes-down-must-come-up model, this makes ample sense. China’s stock market endured almost a perfect storm in 2022: Growing trade conflict with the US, and international outrage of corporate governance, contributed to a selloff that widespread shutdowns caused by the Covid-Zero policy would likely have caused in any case. Once Chinese stocks are in a slough of despond, all good contrarians know that it is time to buy.

However, a lot of the bounce has happened in the last two months. Chinese American Depositary Receipts, as measured by the Bank of New York’s index, and Hong Kong-quoted shares covered by the MSCI China Index have more or less caught up with the MSCI All-World index. An epochal 46% fall for the ADRs at one point is now a more manageable 18% drop for the year. Meanwhile, mainland shares represented by the CSI 300 Index have also regained much ground:

Was that the buying opportunity? What case is there for renewed excitement about China? And can we be sure of the ground we stand on? This time last year, JPMorgan Chase & Co.’s much-quoted equity strategist Marko Kolanovic said: “China was a headwind for performance of various assets this year, but we believe China growth will accelerate in 2022, which should further provide support for global equities and cyclical assets.” JPMorgan’s precise prediction was a for a 38% rise in the MSCI China. As the chart shows, that didn’t happen. It’s as well to remember this when looking at Kolanovic’s outlook for China for 2023: “We remain positive on China, due to favorable monetary conditions as well as an eventual full reopening and end of Covid.” There’s certainly a much more attractively priced entry point now than there was a year ago”

Meanwhile, Christopher Wood, a veteran analyst of Asian markets who writes as GREED & Fear for Jefferies, suggests that it’s now safe to enter the water. But it’s important than he is more confident about relative performance (because he sees US earnings and the dollar as challenged), than about absolute performance in an environment that is likely to see a big public health crisis in the next few months: “The growing evidence of further closet Covid easing this week is clearly bullish for Chinese equities and increases the chance that the emerging market asset class has made a major bottom against both the S&P500 and the MSCI World Index. This is particularly the case given the positive earnings upgrade potential for several Asian markets next year and the risk of earnings downgrades in the US in 2023. Global asset allocators should increase their allocation to emerging markets if they agree with GREED & fear’s base case, namely that monetary tightening expectations and the US dollar have peaked.”

There’s a big currency element to this. China’s yuan has enjoyed a dramatic resurgence in the last two months, driven both by lower yields in the US and hopes that post-Covid opening is real and imminent. It’s dropped below 7.0 per dollar — a level that has caused major political tensions in the past — after one of its strongest appreciations in decades:

In its own right, a rebound after a major selloff makes sense for the yuan. But all the China bulls might take note that this big shift has already happened, and might easily reverse if the post-Covid resumption does not go as hoped. It’s worth heeding these words from Marc Chandler of Bannockburn Global Forex: “The US 10-year yield premium over China topped in late October at slightly more than 150 bp. It fell to almost 50 bp last week before settling around 65 bp. Investors have been eager to believe the Covid pivot, but the risk is that they have gotten ahead of themselves. Of course, less testing will generate less detected cases but there will be other signs of rising infections and strains on the healthcare system. That said, even if one wants to accept these developments at face value, the move is too far too fast. The yuan’s surge offers an opportunity to those who are looking for an opportunity to hedge or reduce CNY exposure.”

China is plainly a more interesting investment opportunity than it was 12 months ago. But, just as then, the case might not be quite as clear as it seems.

  • Financial Markets
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    • Inflation
  • Monetary Policy
Previous articleDecember 12, 2022End of the Road.@GregorMacdonald notes a new EIA report that reports “US battery storage capacity is outpacing even the early growth of the country’s utility-scale solar capacity.”Next articleDecember 12, 2022A Sharper Signal Amid the NoiseBrian Chingone of @verdadcap notes that deleveraging is cyclical, with firms paying down debt as the economy slows.
Showing 241 database articles primarily about Financial Markets

World’s Unusually High Dollar Exposure Risks Fueling Selloff

AI Summary. Global institutional investors hedge only 41% of their foreign-currency exposure — the lowest rate since at least 2015 — leaving portfolios heavily exposed to dollar depreciation. A sudden shift in sentiment could trigger a self-reinforcing dollar selloff as unhedged holders rush to reduce exposure simultaneously.

Ruth Carson, Masaki Kondo, and Anya Andrianova Bloomberg
Date Posted:
September 3, 2026
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A Bloomberg analysis finds only 41% of global investors’ foreign-currency exposure is hedged in six major markets, the lowest level since 2015. Foreigners now hold almost $40T of American assets.

Are unhedged dollar positions setting up a market crash?

Core argument: Global institutional investors hedged just 41% of their foreign-currency exposure as of June 30—the lowest share since at least 2015—leaving dollar-denominated assets acutely vulnerable to a sentiment-driven selloff.

Sift through the filings of pension funds and insurers around the world and one thing stands out: some of the biggest holders of US assets have little protection against a weaker dollar, leaving the currency at risk of steeper declines if sentiment suddenly turns. Across markets [Canada, Denmark, Australia, Taiwan, Japan and Finland for which data is available] investors hedged just 41% of their foreign-currency exposure as of June 30 — the lowest since at least 2015. While not a complete picture, it offers a glimpse into how the sudden rush last year to hedge against dollar losses triggered by President Donald Trump’s global tariff rollout has faded as the US currency slowly stabilized.

Takeaways by Macro Roundup® AI

  1. Global institutional investors hedged just 41% of their foreign-currency exposure as of June 30—the lowest share since at least 2015—leaving dollar-denominated assets acutely vulnerable to a sentiment-driven selloff.
  2. The retreat from peak hedging activity reflects fading demand for dollar-loss protection after the U.S. currency stabilized following the tariff-driven shock, compressing a key buffer against renewed depreciation.

Related Articles:

  • Financial Innovation and the International Monetary System — The U.S. dollar accounts for 59% of international payment values routed through SWIFT and ~90% of global foreign exchange turnover, while the Chinese renminbi has risen to 9% of foreign exchange turnover by displacing other major currencies, not the dollar.
  • The Global Balance Sheet 2026: Imbalance And Divergence — Paper wealth — asset price gains detached from real investment — drove nearly 60% of global household wealth growth in 2025, up from one-third historically. Only 20% came from net new real investment, compared to a 30% historical average.
  • Momentum, Rotation and the Value in Growth — Noting US underperformance relative to the world since the start of 2025, and the fact that the 5 largest US stocks now have a P/E only marginally above that…
  • Financial Markets
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What Are U.S. Treasury Markets Really Telling Us? Part II

AI Summary. 54 percentage point yield increase since 2022. The shift reflects reduced Federal Reserve absorption of long-duration debt, forcing private investors to demand greater compensation for interest rate risk.

Hanno Lustig The Two Cents
Date Posted:
September 1, 2026
Is Database:
Database

Lustig presents a decomposition that attributes 156bp of the 254bp rise in the 10-year yield since March 2022 to an increase in the term premium, which he associates with the additional duration risk borne by investors as the Fed reduced its balance sheet.

Does reduced Fed demand for long-duration debt explain rising Treasury yields?

Core argument: Term premium accounts for 1.56 percentage points — nearly two-thirds — of the 2.54-point rise in the 10-year Treasury yield since March 2022, dwarfing the 98-basis-point contribution from rising expected short rates.

I plot a decomposition of the increase in the 10-year yield into a term premium component and a future short rate component. According to this measure, a big chunk —1.56 pps (or nearly 2/3 rds)— of the 2.54 pps increase in the 10-year yield since March 2022 is actually due to an increase in the term premium. That premium (the red line in the figure) turned negative around 2015, and [when] it bottomed out in 2020, yields (black line) were trading 135 bps below the path of future short rates (blue line). That’s not entirely surprising: The Fed was absorbing a large share of Treasury issuance at the long end of the yield curve —as well as MBS issuance— effectively removing a great deal of interest rate risk from the market.

Takeaways by Macro Roundup® AI

  1. Term premium accounts for 1.56 percentage points — nearly two-thirds — of the 2.54-point rise in the 10-year Treasury yield since March 2022, dwarfing the 98-basis-point contribution from rising expected short rates.
  2. The term premium bottomed at -1.355% in 2020, when Fed absorption of long-end Treasury and MBS issuance stripped duration risk from the market and pushed yields 135 basis points below the expected path of short rates.
  3. The term premium’s steady climb since 2022 signals that investors now demand compensation for bearing interest rate risk rather than paying for the privilege, reversing a multi-year structural distortion created by quantitative easing.

Related Articles:

  • What Are Bond Markets Telling Us? — U.S. bond market indicators, including long-term inflation expectations and default insurance prices, show no meaningful rise in concern about government insolvency or debt sustainability.
  • What Are US Treasury Markets Really Telling Us? Part I — Lusting agrees with Krugman that low CDS prices on Treasurys argue against default panic, but finds them a weak signal. Constructing synthetic Treasuries from…
  • America’s Risky Debt: What Markets See That Policymakers Don’t — The safety premium that investors historically paid for US government bonds over equivalent alternatives has compressed toward zero and, at longer maturities, reversed — with global investors now pricing foreign government bonds as safer than US Treasurys.
  • Financial Markets
  • Fiscal Policy
    • Fiscal Deficits
    • Government Spending
  • GDP
    • Inflation
  • Monetary Policy

Is the AI Buildout Pushing Up Yields?

AI Summary. Heavy corporate investment in new technology can shift businesses from net savers to net borrowers, absorbing household savings and widening the current account deficit, as occurred during the early-2000s technology boom.

Robin Brooks Robin Brooks Substack
Date Posted:
August 27, 2026
Is Database:
Database

Brooks argues, “The AI buildout isn’t why government bond yields are rising,” noting the US non-financial corporate sector was a net saver as of Q1 2026, which suggests government deficit spending is driving up long yields.

Does massive technology investment shift corporations from savers to borrowers?

Core argument: Government dissaving—not corporate capital expenditure—is the primary driver of U.S. domestic savings consumption and current account deterioration.

The chart shows quarterly data for the US saving-investment balance going back to 1990. This is an identity that apportions the current account balance into net saving in various sectors of the economy. Households tend to be net savers, as is the financial sector and non-financial corporates. The government tends to be a net borrower. The last time we had a lot of excitement about technological innovation and higher productivity growth was in the “IT bubble” of the early 2000s, which saw non-financial corporates flip from being net savers to borrowers, i.e. the capex buildout at the time was very large and - for a few years - accounted for the entire current account deficit. Nothing like that’s happening now. It’s government dissaving, i.e. the budget deficit, that’s eating up resources, while the non-financial corporate sector stayed a net saver in data through the first quarter of this year.

Takeaways by Macro Roundup® AI

  1. Government dissaving—not corporate capital expenditure—is the primary driver of U.S. domestic savings consumption and current account deterioration.

Related Articles:

  • AI Is Driving Up Treasury Yields: ‘It Just Touches Everything’ — Heavy corporate bond issuance driven by AI investment has reduced demand for long-term government debt, pushing 10-year Treasury yields up ~0.3 percentage points as investors rotate into higher-yielding corporate bonds.
  • The Other US Capex Question — Weak non-AI business investment in the U.S. is driven primarily by near-zero labor force growth from tightened immigration policy, not by AI spending crowding out capital, since corporate savings are sufficient to fund both simultaneously.
  • Corporate America Is Minting Money—and Not Just in Tech and Finance — S&P 500 earnings per share are growing above 13% year-over-year for the sixth consecutive quarter, with sales rising at the fastest pace since late 2022 and margins expanding across most sectors. The gap between earnings-per-share growth and net income growth has narrowed to under 1 percentage point, indicating profit gains
  • Financial Markets
  • Fiscal Policy
    • Fiscal Deficits
  • GDP
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Bessent Bounce Starts to Emerge in Long Bond Market Metrics

AI Summary. The gap between long-term government bond yields and equivalent swap rates has narrowed to its smallest in months, reflecting increased investor willingness to hold long-dated government debt following expanded buybacks of longer-dated bonds.

Greg Ritchie and Elizabeth Stanton Bloomberg
Date Posted:
August 26, 2026
Is Database:
Database

Modest compression of the spreads between Treasury yields and synthetic “swap” securities (~5.5bp for the 30 year and ~3bp for the 10 year) suggest Bessent’s Treasury purchase program has had a degree of success at lowering long-term government yields.

Are investors returning to long-term government bonds?

Core argument: The 30-year Treasury-swap spread narrowed to its smallest since February following Bessent’s announcement, as Treasuries outperformed equivalent-maturity swaps and benchmark yields drifted lower.

Since Bessent’s announcement, Treasuries have outperformed equivalent-maturity swaps, narrowing the 30-year spread to the smallest since February. Swaps are popular with some investors as an alternative to owning bonds; the gap between [swap rates] and US government yields [gauges] how willing [investors] are to hold Treasuries instead. The 10-year swap spread has compressed too, with the gap three basis points smaller at around 38 basis points. Still, the recent drop has only dented a years-long rise in long-term US government borrowing costs. The 10-year US yield inched up 3bp to 4.66% after touching 4.75% last week. “While conducting buybacks at the long end of the yield curve may technically decrease yields, higher structural US budget deficits, which [require] a significant supply of Treasuries to finance the US debt, [are] not changing anytime soon,” said Libby Cantrill, head of public policy at Pimco.

Takeaways by Macro Roundup® AI

  1. The 30-year Treasury-swap spread narrowed to its smallest since February following Bessent’s announcement, as Treasuries outperformed equivalent-maturity swaps and benchmark yields drifted lower.
  2. The Treasury’s plan to at least double longer-dated bond buybacks drove the repricing.
  3. the swap-yield gap—a direct gauge of investor preference for Treasuries over derivatives—compressed in response.

Related Articles:

  • Let the Bond Market Speak — Treasury intervention in a functioning bond market suppresses the price signal that transmits collective market information to decision makers, removing the mechanism by which orderly volatility performs its intended economic function.
  • US 30-Year Bonds Erase Gains From Treasury’s Buyback Surprise — US government bond yields have returned to near two-decade highs despite a buyback program targeting long-dated debt, indicating that investor concern over rising government borrowing remains unresolved.
  • America’s Risky Debt: What Markets See That Policymakers Don’t — The safety premium that investors historically paid for US government bonds over equivalent alternatives has compressed toward zero and, at longer maturities, reversed — with global investors now pricing foreign government bonds as safer than US Treasurys.
  • Financial Markets
  • Fiscal Policy
    • Fiscal Deficits
    • Government Spending
  • GDP

America’s Risky Debt: What Markets See That Policymakers Don’t

AI Summary. The safety premium that investors historically paid for US government bonds over equivalent alternatives has compressed toward zero and, at longer maturities, reversed — with global investors now pricing foreign government bonds as safer than US Treasurys.

Hanno Lustig Aspen Economic Strategy Group
Date Posted:
August 21, 2026
Is Database:
Database

Lustig shows the premium investors pay for Treasurys over substitutes such as AAA corporate debt and G10 sovereign debt has compressed post 2020. “Investors are now indifferent between [Treasurys] and close substitutes.”

Are global investors losing confidence in US government debt safety?

Core argument: The U.S. Treasury safety premium has compressed to near zero post-2022 and at points reversed, signaling that markets no longer treat Treasurys as unambiguously superior to credit-risk-adjusted corporate equivalents.

The top panel uses the credit risk-adjusted AAA-Treasury spread. We use the CDS to strip the default-risk compensation out of the corporate-bond yield. What remains is a clean estimate of the safety premium that investors pay for Treasurys over otherwise-equivalent corporate exposure. Post-2022, it has compressed toward zero, and at points, has reversed. The bottom panel uses the Treasury Premium, defined as the difference between the synthetic-dollar foreign sovereign yield and the US Treasury yield at the same maturity. The synthetic-dollar foreign yield is constructed by swapping the coupon payments on foreign G10 sovereign bonds into dollars using the foreign-exchange forward market. This eliminates currency risk over the life of the bond, so the resulting dollar cash-flow stream is directly comparable to a US Treasury yield of the same maturity. At longer maturities, global investors now seem to prefer the safety of foreign G10 bonds.

Takeaways by Macro Roundup® AI

  1. The U.S. Treasury safety premium has compressed to near zero post-2022 and at points reversed, signaling that markets no longer treat Treasurys as unambiguously superior to credit-risk-adjusted corporate equivalents.
  2. At longer maturities, global investors now price dollar-hedged G10 sovereign bonds above U.S. Treasurys, marking a structural erosion of the safe-haven premium that has historically anchored U.S. borrowing costs.

Related Articles:

  • The United States Capital Structure — Government bondholders hold the riskiest position in the U.S. fiscal structure, absorbing adverse shocks through inflation or financial repression, while entitlement recipients function as senior claimants whose payments are politically protected.
  • Are Government Bonds Safe in Times of War and Pandemic? — US government bonds, normally safe assets, become risky in times of war because of negative real returns due to bursts of inflation. As in the fiscal theory of…
  • U.S. Treasury Investors Are Long in AI — U.S. government debt acts as a leveraged bet on long-run productivity growth, because tax revenue rises automatically with faster growth while spending commitments stay flat. Each 0.1 percentage point increase in permanent productivity growth raises the fundamental value of government debt by $1.3tn, implying a 71 basis point decline in
  • Financial Markets
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    • Fiscal Deficits
    • Government Spending
  • GDP
  • Monetary Policy

Yen Intervention = US Self-Preservation

AI Summary. Japan holds $1tn in U.S. government bonds — the largest foreign position globally — giving the U.S. a strong incentive to support a stronger yen rather than risk Japan selling those bonds or raising rates sharply enough to redirect domestic capital away from U.S. debt markets.

Katie Martin Financial Times
Date Posted:
August 4, 2026
Is Database:
Database

To shield Treasuries from selloffs and higher yields, the US prefers its own yen support tools: ESF yen purchases as a signal and the Fed’s rarely used FIMA facility, lending Japan dollars against Treasuries to forestall direct Japanese Treasury sales.

Does the U.S. need a stronger yen to protect its debt markets?

Core argument: Japan’s $1 trillion in U.S. Treasury holdings—the world’s largest foreign position at ~4% of total outstanding—give the U.S. a direct strategic interest in defending the yen, as Japanese dollar sales would intensify pressure on a 10-year yield already at 4.7%.

Japan has two traditional routes to push up the battered yen. One is a massive rise in Japanese interest rates, and the other is massive sales of dollars — i.e., of US Treasuries. Neither would be good news for the US. Japanese yields are already seriously elevated by historical standards — 2.8% on the 10-year and 4% on the 30-year. The US is just not in a position to lose a big buyer of Treasuries when its own 10-year yield is tickling 4.7% and the 30-year is well over 5. And it certainly can’t tolerate a big seller of Treasuries, in the form of Japanese authorities selling dollars, hoping to prop up the yen. (Japan’s Treasury holdings already lead the world, at $1tn, or just below 4% of the total outstanding.) Much better to stand behind Japan and hope to scare off the yen sellers. Recent use has been made of the Exchange Rate Stabilization Fund [ESF] to signal that intent. Bessent has also said he will encourage the Fed to bump up Fima, the Fed’s international repo facility, in the coming months. This tool has rarely been wheeled out since it was established during the 2020 Covid shock. Its current $60bn per counterparty, per day limit has been reached just once. The fact that US authorities approved the use of this facility suggests the US side sees potential risk that fx intervention could push up US Treasury yields.

Takeaways by Macro Roundup® AI

  1. Japan’s $1 trillion in U.S. Treasury holdings—the world’s largest foreign position at ~4% of total outstanding—give the U.S. a direct strategic interest in defending the yen, as Japanese dollar sales would intensify pressure on a 10-year yield already at 4.7%.
  2. U.S. participation in Friday’s joint yen intervention, executed via euros from the Exchange Stabilization Fund, delivers a credible “back off” warning to yen sellers without triggering the Treasury market disruption that direct dollar sales would cause.
  3. Japan’s 10-year yield at 2.8% and 30-year at 4%—elevated by historical standards—redirect domestic capital away from U.S. Treasuries, compounding Washington’s vulnerability at a moment when its 30-year yield exceeds 5%.

Related Articles:

  • US and Japan Aim to Transform Yen Landscape With Joint Moves — A coordinated currency intervention by the US and Japan to strengthen the yen exceeded the scale of previous joint efforts, with Japan alone spending an estimated $53bn in a single day.
  • Shadow Government Bond Yields in the G10 — Government bond yields across major economies are artificially suppressed by central bank intervention; if those interventions were removed, long-term yields would rise materially above current market levels.
  • Global Debt Report 2026 — Across the OECD last year, $13.5T of governmental debt needed refinancing, 70% ($9.5T) of which was US debt, up from 57% in 2020. The US and Japan were…
  • Financial Markets
  • Fiscal Policy
    • Fiscal Deficits
    • Government Spending
  • GDP
  • Monetary Policy
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