The “rate check” on Friday to put a floor under the yen was the latest step.
By Wolf Richter for WOLF STREET.
On around midday Friday came the latest step, a “rate check,” with which Treasury Secretary Scott Bessent attempted to put a floor under the yen that had plunged against the dollar, and push back down long-term US Treasury yields that had surged, as he saw the turmoil in the Japanese bond market, and the plunge of the yen, bleeding over into the US.
The New York Fed, at the request of the Treasury Department and acting as fiscal agent for the Treasury Department, asked its primary dealers what exchange rate they would get if the NY Fed started buying yen through them. This “rate check” was a signal that the US government is ready to intervene in the currency market to support the yen against the USD.
As soon as this happened around midday Friday, the USD began to plunge against the yen, and the yen jumped from 159.2 yen to the USD to 155.7 by Friday evening (hourly chart via Investing.com):
On Wednesday, Bessent had blamed the surging long-term US Treasury yields on the bond-market meltdown in Japan, during which the 30-year Japanese Government Bond yield spiked by 42 basis points in two days and drove it to 3.91%, the highest since the 30-year bond was introduced in 1999. The crucial 10-year JGB yield surged by 15 basis points in two days. And the yen re-plunged against the dollar. The trigger had been Prime Minister Sanae Takaichi’s call for increased government spending with simultaneous tax cuts.
The 10-year US Treasury yield had surged to 4.30% on Wednesday morning, up by 17 basis points in a week, even as the Trump administration is trying to get mortgage rates to come down. But mortgage rates track the 10-year Treasury yield, with a varying spread. And this surge of the 10-year yield caused mortgage rates to jump back to 6.20%, from 6.01% a few days earlier, according to the daily measure of 30-year fixed mortgage rates by Mortgage News Daily. And Bessent blamed that on the bond market meltdown in Japan.
“It’s very difficult to disaggregate the market reaction from what’s going on endogenously in Japan,” Bessent told Fox News at the time. And he said that he’d gotten in touch with Japanese officials, and said that he is “sure that they will begin saying the things that will calm the market down.”
With this two-step three-day jawboning — first on Wednesday when Bessent said he “got in touch” with Japanese authorities, and then on Friday, with the “rate check” — the 10-year yield dropped from 4.30% to 4.23% (hourly chart via Investing.com).
To help push mortgage rates down, the Government Sponsored Enterprises Fannie Mae and Freddie Mac started buying back some of the MBS they’d issued. This started in 2025. But on January 8, this was moved to the front pages when Trump directed Fannie and Freddie to buy back $200 billion in MBS, about the maximum they can buy back under current legal limitations.
But they don’t have the available cash to do that, they only have enough available cash to buy some MBS. They could also issue bonds and then use the cash proceeds to buy those MBS, but that would put further pressure on the bond market. So whatever.
This announcement was a masterful if temporary stroke of jawboning down mortgage rates, which plunged by 20 basis points combined on Friday January 9 and Monday January 12.
It didn’t last long, however. By Wednesday January 20, mortgage rates where right back where they’d been on January 8. They’d just done a big U (daily chart via Mortgage News Daily).
Obviously, Bessent wouldn’t blame the surging long-term Treasury yields on the ballooning US deficit and the flood of new supply of bonds coming on the market that investors will have to absorb, and he wouldn’t blame it on inflation that accelerated further and that worries the bond market. Jawboning is a lot easier to do than to address those issues.
The bond market might not be happy for long with this jawboning. Inflation is a big issue for bond investors as bonds lose purchasing power due to inflation, and yield is supposed to compensate for the loss of this purchasing power, plus some. But long-term yields are too low to compensate investors for hotter inflation in the future.
And inflation keeps moving further away from the Fed’s target, amid government policies of prodigious deficit spending and Trump’s pressure on the Fed to cut short-term interest rates. They want to run the economy “hot,” meaning higher growth and more inflation, which provides fertile ground for inflation to bloom. Given this scenario, the bond market is still very sanguine, surprisingly sanguine, despite the recent ripples.
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Still waiting to buy any bond beyond 2 years. I suspect there will be a bear market in bonds for quite a while, no sign of serious deficit reduction. When the administration wants to run the country hot, one doesn’t want to buy bonds.
I was around in the late 1970s in a professional role, it got very ugly for bonds there at the end until Volcker, Reagan and the populace got serious about curtailing Inflation.