Treasury's Bond Buyback Boosts Yen, Weakens Dollar
The US Treasury has increased its long-term bond buybacks from $2 billion to $4 billion, effective September 9. This move has led to a fall in US dollar yields and is reminiscent of Japan's currency intervention practices.
The markets have realized that a yield of 5.3% on the US debt market is a pain threshold for the Treasury, just as 164 on the yen is for Tokyo. The wide interest rate differential between the Fed and the BoJ means the yen is being actively sold as a funding currency in carry trades.
The US Treasury is having to go against the fundamentals, with bond yields influenced not only by fiscal stimulus and a widening budget deficit but also by geopolitics and competition from artificial intelligence. Hyperscalers are raising funds to finance AI-related projects by issuing corporate bonds, drawing money away from the US debt market.
Citigroup believes that the main cost of the Treasury's attempts to control bond yields is a weaker dollar. The FxPro Analyst Team notes that without support from the Bank of Japan, the gains made by bears on USDJPY through coordinated currency intervention cannot be sustained.