Treasury Yields Rebound, Yield Cap Cements JPY Strength

The rising global bond yields and firmer oil prices have pushed US Treasury yields to pre-buyback levels. The yield cap on longer-term Treasury yields, along with the Japanese Yen intervention, has effectively capped USD/JPY, making it more expensive for investors to bet against the currency.

According to Elias Haddad from Brown Brothers Harriman (BBH), the recent bond yield increases are a result of higher crude oil prices and increased expectations of central banks' policy rates. This trend is evident in 30-year US Treasury yields, which have regained their pre-buyback levels after dropping following the August 19 Department of the Treasury buyback announcement.

The USD/JPY has largely retraced its post-July 31 joint US-Japan intervention slump. Treasury Secretary Scott Bessent defended the unscheduled buyback announcement as a signal, not an attempt to dictate market prices. His aim was to make sure market participants understand that there is no one-way trip in markets and that fundamentals are being considered.

Both the yield cap on longer-term Treasury yields and the Japanese Yen intervention raise the cost of betting against Treasuries or JPY, neither guaranteeing a reversal but making it more expensive for investors to take a contrarian view.