The Treasury Secretary went on stage Tuesday and said this out loud.
“I am the house now. And you can bet against me if you want.”
He was talking about the Japanese yen, which sounds like it has nothing to do with you until you understand what is being defended here.
Because there is exactly one thing holding this bond market together right now, and it is not the Fed and it is not the economy. It is a currency most people never look at.
Oil went through $100 today and the 10-year should be screaming about it.
It isn’t yet, and there’s a reason.
West Texas Intermediate crude, the US benchmark, is trading around $95.78, Brent went through $100 a barrel, and diesel prices are climbing. The Iran situation keeps escalating, with the US now saying it has sunk 10 Iranian shadow fleet tankers in the last week, five of them yesterday alone.
Every one of those is inflationary. Every one of those should be hammering the bond market.
And the 10-year is at 4.84%. Which is high, and it’s the highest since November of 2023, but it should be a whole lot worse than that given what oil is doing.
So why isn’t it?
The Currency Nobody Watches
The yen has been strengthening. It’s trading just under two-thirds of a penny, its highest level since February.
Stay with me on this chain, because it’s the whole thing.
Japan is one of the largest foreign holders of US government debt. When the yen gets weak, Japanese investors have a real incentive to sell their Treasuries and bring that money home, because the currency translation makes it worth doing.
Now flip that around. When the yen is strong, the incentive disappears. Nobody’s selling Treasuries to repatriate, because there’s nothing to gain from it.
So a strong yen means one of the biggest holders of American debt stays put. And one of the biggest holders staying put is why the long end of the curve, meaning the 10, 20 and 30 year bonds, hasn’t already come apart under an oil shock.
If you want to know why we’re not falling apart, it’s the continued strength in the yen. Oil up big, and the 10-year still hasn’t exploded.
Which Brings Us To Bessent
And that strength has been bought.
On July 31st the US and Japan ran a coordinated yen-buying operation, the first joint intervention since 1998. The US sold euros through Goldman and Morgan Stanley to purchase yen.
Japan then spent about $96.5 billion of its own money defending the currency between July 30th and August 26th, which was the largest month of intervention on record.
Which is what he means by being the house. He’s been in the market personally, he coordinates with Japan’s finance minister, and he says he has what he calls asymmetric information about what the Bank of Japan does next.
His words: it’s my dream, I have asymmetric information.
Today The Market Called It
Treasury announced this morning that it will buy back up to $6 billion of 10 and 20 year notes tomorrow. That’s triple the normal operation, and it follows Bessent’s August announcement that he’d at least double it.
The entire point of that exercise is to put a lid on long-end yields.
Yields went up anyway.
The 10-year hit 4.841%, the 20-year climbed to 5.314%, and the 30-year punched through 5.3% and stayed there. Mark Spindel, who runs money at Potomac River Capital, called it what it was. Hank Paulson’s bazooka this is not.
So the house showed its hand and the table raised him.
The Warning From His Own Mentor
Stanley Druckenmiller ran money for decades and he mentored Bessent personally. He put this in the Wall Street Journal.
“Once markets believe Treasury is defending a price, every rise in yields becomes a test of official resolve, and the operations must grow to survive the tests.”
And here’s the crazy part…
“Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding.”
That’s from the guy who taught him.
What I’m Watching
I think we’re at the end of the Japanese yen run, unless they intervene more. And the Bank of Japan has a rate decision on the 17th and 18th, which is the next place this gets tested.
If the yen turns, the incentive to sell Treasuries comes back, and it comes back into an oil shock and a Fed meeting in the same week. That’s when the 10-year goes to 5% and markets stop being able to ignore it.
Meanwhile my macro dashboard has gone completely defensive. Materials, healthcare, staples, energy, financials and utilities are all showing strength, while housing is off and so is growth.
I’m leaning bearish, I’m avoiding housing entirely, and I need a heck of a reason to be long anything outside those defensive groups.
Watch the yen. It’s the load-bearing wall in this whole thing, and one man is holding it up while telling everybody to take their best shot.
Your only option,
Mark Sebastian
P.S. This will create volatility in a market that’s been on mute for months. We’ll likely see that volatility in the QQQs, which is what Olivia Voz specializes in. Join her tonight at 6pm live to see how she’s been playing the QQQs and how she’s been able to hit on 44 out of her last 50 trades.
P.P.S. One thing worth watching that nobody is talking about.
Japanese retail investors pushed their net short yen positions to about 3.61 trillion yen last week, roughly $23.5 billion. That is the crowd on the other side of the Treasury Secretary’s trade, and they are not backing down either.
Somebody here is going to be spectacularly wrong, and the Bank of Japan decides which one on the 18th.