US Treasury Sells Euros to Support Yen, Exposes Bond Market Stress

The US Treasury Department has taken an unconventional approach to supporting the Japanese yen by selling euros rather than dollars, in order to avoid weakening the dollar and limiting pressure on the US Treasury market.

This unusual intervention strategy was reported by The Financial Times, which stated that the European Central Bank (ECB) was informed only after the move. According to the report, conventional support for the yen would have forced Japan to raise dollars by selling US Treasuries, pushing prices down and yields up.

Japan has been intervening in the foreign exchange market for months, with its foreign currency reserves falling by $75.6 billion in May. To reduce the need for outright Treasury sales, Japanese officials said they would use the Federal Reserve's Foreign and International Monetary Authorities facility, which lends dollars against Treasury collateral.

The move is seen as a sign of severe underlying stress in the US bond market, with the national debt hovering near $35 trillion and annual net interest payments surpassing $1 trillion. To hedge against sudden rate spikes, derivative traders are advised to use options on Treasury futures.