This week, US financial markets experienced a rare synchronized downturn, with stocks, bonds, and the dollar all weakening simultaneously. The Japanese yen also failed to escape the pressure, as investors began questioning the effectiveness of the US Treasury's policies aimed at stabilizing long-term interest rates through bond buybacks and supply management.

Nomura Securities macro strategist Nakazawa Matsuzawa believes the "Bessent put option" — an attempt to suppress long-end yields by expanding Treasury buybacks — is losing its effectiveness. The policy intervention has not only failed to sustain bond market stability but has also intensified downward pressure on the dollar. On Wednesday, the Treasury announced it would "at least double" its buyback scale for 10- to 30-year US Treasuries, just two weeks after the previous buyback plan was unveiled. However, the market support lasted less than a day: long-end yields briefly retreated before rebounding sharply, ending the week roughly unchanged.

More concerning is that America's policy path may serve as a cautionary tale for Japan. Matsuzawa warned that if Japan also attempts to lower long-term financing costs through bond supply management, pressure could shift from the bond market to the currency market, ultimately manifesting as yen depreciation. Should market confidence deteriorate further, capital outflows could occur, potentially triggering risks similar to those seen during the 1997 Asian Financial Crisis.

Inflation Concerns Dismissed, Raising Fears of Falling Behind the Curve

Market interpretation of Bessent's move has been decidedly negative, with the dollar's reaction even more pronounced than that of Treasuries. Investors worry that if the Treasury stabilizes the bond market through supply-demand adjustments, the process of catching up with the "behind the curve" policy stance — which might otherwise require rate hikes — could be further delayed, potentially keeping monetary policy looser for longer.

Bessent has publicly stated that market concerns over inflation "do not align with fundamentals," attributing current price pressures primarily to energy costs and characterizing them as temporary. This assessment may suggest he underestimates AI's potential impact on economic growth, inflation, and capital supply-demand dynamics. The Federal Reserve's FOMC minutes released this week also revealed significant disagreement among officials over whether AI-driven inflationary pressures will transmit broadly, with no consensus yet formed.

Beware the "Bessent Put" Pitfall: Suppressing Long-End Yields May Backfire on the Yen

The report specifically warns that Japan should view the failure of the US "Bessent put option" as a cautionary precedent rather than remain detached. The yen remained weak this week, but Japanese stocks posted the largest decline among G3 markets, falling 3.3%, while US and European markets dropped 1.9% and 1.1% respectively. Meanwhile, 10-year US Treasury yields rose 1 basis point, European government bond yields climbed 5 basis points, while Japan's 10-year yield actually fell 3 basis points. This divergence partially reflects shifting market expectations regarding Japanese policy.

The problem lies in the possibility that if Japan follows America's lead — reducing long-term bond issuance and using supply-side measures to suppress yields — the side effects could manifest as yen depreciation. Given that the Bank of Japan holds nearly 50% of Japanese government bonds, its control over the bond market is far stronger than the Fed's, but this also means market distortions may be more visible on the currency side.

More alarming is that the yen is already a weak currency, unlike the dollar which serves as a key reserve currency. Matsuzawa draws parallels between the current environment and the Asian currency crisis intensified during the 1990s tech boom, noting that if Japanese policy goes astray, the risk of Japan transitioning from a capital inflow destination to a source of capital repatriation is considerably high. In this context, he argues that Japan must at minimum explicitly abandon expansionary policy credit aimed at fighting deflation — a necessary condition for stabilizing market expectations.

BOJ Rate Hike Expectations Intensify as AI Capital Spending Heightens Credit Market Competition

This week, market pricing for the Bank of Japan's rate hike path has further intensified: the probability of a September hike rose to approximately 80%, with expectations already incorporating three future hikes and a terminal policy rate of 1.75%. Japan's ultimate rate expectations (2-year forward OIS) also ticked up from 2.19% to 2.23%.

The BOJ's recent communications have indeed leaned hawkish, with markets even beginning to discuss accelerated tightening. However, Nomura Securities believes Japan's economy retains some resilience, and Deputy Governor Himino's remarks may strengthen September hike expectations but do not necessarily imply a commitment to faster tightening. Consequently, with markets already highly priced, even a September hike may not constitute a new positive catalyst.

In contrast, the more concerning dynamic is the funding competition between tech corporate debt and government bonds. Credit default swap (CDS) spreads for certain hyperscalers have risen to historical highs, reflecting market concerns that massive AI capital expenditures are squeezing corporate financing capacity. The high capital demands of AI investment are transmitting to credit markets and competing with government debt for funding.

While the US earnings season has further validated AI investment's support for corporate profits and capital spending, if tech corporate debt markets remain under pressure, changes in financing costs and risk appetite could feed back into equity markets. Therefore, whether tech corporate bonds can stabilize will serve as a key external indicator for whether stocks can hold their ground next week.

Additionally, Warsh's remarks on balance sheet policy (QT) at the Jackson Hole symposium merit close attention. If he signals continued balance sheet contraction and avoids injecting excessive liquidity into financial markets, liquidity conditions could tighten further, putting pressure on equity markets. His longstanding caution against excessive liquidity distorting asset prices makes this risk particularly noteworthy.