Edward Conard

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Upside of Inequality Oxford Unintended Consequences

AI Summary. The US dollar's strength has pushed the yen close to the 150 yen per dollar level at which Japanese authorities are widely expected to intervene to support the currency. Such intervention would likely push bond yields higher, undercutting bets that yields will soon fall.

John Authers Bloomberg
Date Posted:

The weakening of the yen relative to the dollar will likely force an intervention that will put additional upward pressure on yields. @johnauthers

Does currency intervention abroad push bond yields higher?

Core argument: The yen came within a whisker of falling below Y150/$, a level at which many assume Japanese authorities would feel obliged to intervene to prop up the currency, as they did when it briefly topped that level a year ago.

In currencies, the US dollar continued its recent rampaging strength, with the yen coming within a whisker of dropping below the level of Y150/$, at which many assume the Japanese authorities would feel obliged to step in to prop up the currency, as they did when it briefly topped that level a year ago. Any intervention by Japanese authorities would likely send yields further upward, so this is a reason for caution about betting on them to fall in short order. The logic is that the Federal Reserve will be happy for yields to rise until they “break something,” at which point bonds’ prices would rise as their yields fell. That makes sense, but if the first thing to break is the patience of the Ministry of Finance in Tokyo, then such a bet on buying bonds would lose money.

Takeaways by Macro Roundup® AI

  1. The yen came within a whisker of falling below Y150/$, a level at which many assume Japanese authorities would feel obliged to intervene to prop up the currency, as they did when it briefly topped that level a year ago.
  2. Intervention by Japanese authorities would likely push yields further upward, a reason for caution about betting on yields to fall in short order.
  3. The argument that the Federal Reserve will welcome rising yields until they "break something," at which point bond prices would rise and yields fall, would lose money as a trade if the first thing to break is the patience of Tokyo's Ministry of Finance.

Related Articles:

  • BOJ Shock Has Wall Street Gaming Out the Global Spillovers — The Bank of Japan has signaled it will allow yields to trade toward 1% from roughly 0.5%, though its intervention in the market suggests that shift is not imminent. With Japanese domestic investors holding around $2.5tn of US stocks, bonds and credit, Wall Street is weighing volatile spillovers that could reinforce higher-for-longer interest rates.
  • Why Are Long Rates Going Up? — The rise in long-term interest rates is attributed less to shifting Federal Reserve expectations than to the US sovereign credit downgrade, Japan's exit from yield curve control, the Federal Reserve shrinking its balance sheet, fewer dollars for China to recycle as exports fall, the US budget deficit, and larger Treasury auctions.
  • Raising Anchor — The Bank of Japan's low interest rate policy anchors global bond yields, and that anchor is set to move higher, making U.S. Treasury bonds less attractive to Japanese investors. With this marginal source of demand fading as Treasury supply is set to increase, U.S. yields are likely to drift higher.
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