U.S. Treasury Secretary's "three-pronged approach" to stabilize U.S. Treasuries: joint intervention in the yen, adjustment of debt issuance language, and support for Waller, Wall Street detects signs of anxiety.

As the 30-year U.S. Treasury yield soared to a 19-year high of 5.27% and the 10-year yield broke through 4.75%, U.S. Treasury Secretary Scott Bessenet was putting together an unprecedented strategy. Over the past week, he led the first joint intervention in the yen since 1998, dropped hints in the quarterly refinancing statement about potentially reducing long-term debt issuance, and publicly defended the communication strategy of Federal Reserve Chairman Kevin Walsh. Wall Street traders and strategists believe these signals indicate that Bessenet is attempting to do everything possible to stop the further rise in long-term bond rates. Priya Misra, a portfolio manager at JPMorgan Asset Management, commented: "The Fed and the Treasury are certainly concerned about the level of long-term rates. Intervening in Japan, supporting Walsh, and possibly reducing long-term bond supply could be the Treasury's attempt to signal that they are aware of movements in the interest rate markets and will not hesitate to use all available tools." "Support for the yen, safeguard U.S. bonds": The real motivation behind the first joint action in 28 years On August 3, the U.S. and Japan's treasuries simultaneously confirmed their joint intervention in the foreign exchange market by buying yen. This marked the first intervention in the yen's exchange rate by the U.S. since 1998 and the first action to support the yen in 28 years. On the same day, a little note captured by reporters unexpectedly revealed the behind-the-scenes driving force: Bessenet's "to-do list" at a cabinet meeting under Trump prominently stated: "Buy yen (JPY), $5 to $10 billion." The true motivation for this action is far more complex than simply "supporting an ally." Japan is the largest foreign holder of U.S. Treasuries, with holdings exceeding $1.1 trillion. If Japan were forced to sell U.S. bonds to fund its intervention, it would directly push up already high long-term interest rates in the U.S. Against the backdrop of the 10-year Treasury yield reaching its highest level since January 2025 and the 30-year yield touching a peak not seen since 2007, Washington's worries about this scenario have escalated from theoretical concerns to urgent policy actions. Even more significant is the method of operation. Bessenet did not choose to sell dollars to buy yensuch an action would directly push up U.S. bond yieldsbut instead intervened by selling euros and buying yen, cleverly avoiding a direct impact on the U.S. bond market. Joe Brusuelas, Chief Economist at RSM, commented: "Bessenet, as a hedge fund manager, saw an opportunity to depress the yield curve while supporting the dollar and also providing support to a major ally of the U.S." Bessenet also played another key card simultaneously. After the intervention, he publicly called for the Fed to expand its "Foreign and International Monetary Authorities Repo Facility" (FIMA Repo Facility). This facility allows foreign central banks to borrow dollars against their holdings of U.S. Treasuries without having to sell bonds directly in the market. Bessenet clearly stated that, given the bond market's size, which has far surpassed that of when this mechanism was established in 2020, "it makes sense for the Fed to consider expanding the size of this tool." A senior macro strategist at State Street noted that this signal "could be more important than the intervention itself"it indicates to the market that Japan can obtain dollar liquidity without needing to sell U.S. bonds. By shifting Japan's "arsenal" from "selling U.S. bonds" to "collateralizing U.S. bonds," Bessenet fundamentally cut off the transmission chain of yen depreciation bond selling rising yields. John Velis, a macro strategist at Bank of New York, commented: "Given the current spending policies and the war situation, it will be very difficult in the long term to alleviate economic pressure." Implying a reduction in long-term bonds: Breaking the market expectation of "only increases" If the intervention in the yen was Bessenet's first card, his wording adjustments in the quarterly refinancing statement were a release of signals with broader implications. On August 6, the U.S. Treasury, in its quarterly refinancing statement, changed the phrasing regarding the future auction size of coupon-bearing bonds from "potential future increases" to "potential future changes." This was the first directional easing in long-term bond issuance guidance since Bessenet took office in early 2025. The market immediately interpreted this as a signal that the Treasury might reduce the auction size for 20-year and 30-year government bonds. A BMO Capital Markets survey found that about 61% of respondents expect the next move for the 30-year Treasury auction size will be a decrease rather than an increase. Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, believes this change in wording "helps improve the market atmosphere at the long end of the yield curve." This signal breaks the long-held market expectation that U.S. Treasury issuances would "only increase." With the size of the U.S. Treasury market having doubled to about $31 trillion since 2018, any marginal changes on the supply side could significantly impact long-term interest rates. However, Deutsche Bank strategist Steven Zeng also pointed out that given the government's massive financing needs, a reduction in long-term bond issuance is not the baseline scenario; the change in wording might be a temporary measure to mitigate the market's negative reaction to an expansion in auctions. Defending Walsh: A battle of detox and market confidence Bessenet's third strategy is to defend Federal Reserve Chair Walsh. After the FOMC meeting in July, Walsh refused to provide clear guidance on how or when the central bank would lower inflation, leading to a significant sell-off in the bond market. In the face of skepticism regarding Walsh's credibility in controlling inflation, Bessenet publicly defended him in the media, describing Walsh's communication strategy as a "detox"helping financial markets and journalists break free from excessive reliance on the Fed's forward guidance. However, Bessenet's comprehensive strategy faces profound internal contradictions. On the one hand, he is attempting to lower long-term interest rates through supply-side actions (intervening in the yen, implying cuts to long-term bonds); on the other hand, the "silent communication" that he supports from Walsh is precisely one of the factors pushing up long-term interest ratesmarkets demand higher term premiums due to the lack of policy certainty. Phoebe White, head of U.S. rate strategy at UBS, pointed out that the Treasury's recent actions might produce limited effects, but it indicates that "if the Treasury can take any measures to stop long-term yields from rising further, it will use all available tools." The limitations of Bessenet's measures: Structural forces far exceed the Treasury's toolbox Despite the wide interpretations of Bessenet's three-pronged approach, its actual influence faces severe structural constraints. While Bessenet's actions did have short-term effects10-year yields briefly fell to 4.61% after the intervention and the drop in oil pricesanalysts generally believe their impact is limited. The 30-year yield remains above 5%, and the 10-year yield is around 4.62%. Firstly, the persistence of inflation. Inflation has been consistently above the Fed's 2% target for nearly five years. Bondholders need to see conclusive evidence that inflation is truly under control before they are willing to lend at lower rates. Strategists at BNP Paribas indicate that reducing long-term bond auctions is one of the few strong measures to depress yields, but if the Treasury gradually releases signals, it may lose the shocking effect of a policy surprise. Secondly, the scale of the deficit. The U.S. government adds nearly $2 trillion to the deficit each year, requiring the continuous issuance of large amounts of new debt. Deutsche Bank believes that given the governments enormous financing needs, reducing long-term bond issuance is not the baseline scenario. CIBC strategists directly stated that reducing some coupon-bearing bond auctions "is simply not on the table." Thirdly, the impact of geopolitical events. The surge in oil prices due to the war in Iran has triggered a new round of inflationary shocks, pushing the 10-year Treasury yield up to about 4.65%, above levels seen at the beginning of Trumps second term. Strategists at Canadian Imperial Bank of Commerce warn that if short-term bond issuance is vastly increased to reduce long-term bond supply, short-term yields may also rise to attract more buyers. "As long-term rates rise, the U.S. Treasury market has clearly become so fragile that we urge foreign holders not to sell," stated Peter Boockvar, CIO of Onepoint Bfg.