This week, the US market witnessed a rare simultaneous decline across stocks, bonds, and the dollar, with the Japanese yen also failing to escape the selloff. Market confidence in the Treasury Department's strategy of stabilizing long-end rates through bond buybacks and supply management is beginning to erode.

According to Nomura macro strategist Matsuzawa, the "Bessent put" – an attempt to suppress long-end yields by expanding Treasury buybacks – is losing its effectiveness. Policy intervention has not only failed to provide sustained stability to the bond market 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 Treasuries, just two weeks after its previous repurchase plan. Yet the market support lasted less than a day: long-end yields briefly dipped before quickly rebounding, finishing the week roughly flat.

More concerning is that the US policy trajectory may serve as a cautionary tale for Japan. Matsuzawa warns 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. If market confidence deteriorates further, it could trigger capital outflows and even risks reminiscent of the 1997 Asian Financial Crisis.

Bessent Downplays Inflation Risks, Markets Fear "Behind the Curve" Will Be Harder to Correct

Market interpretation of Bessent's maneuvers has been decidedly negative, with the dollar's reaction even more violent than that of Treasuries, weakening noticeably. The concern is that if the Treasury stabilizes the bond market through supply-demand adjustments, the process of catching up to an "inflation-behind-the-curve" scenario – which would typically 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 as a temporary factor. This assessment suggests he may be underestimating AI's potential impact on economic growth, inflation, and the supply-demand dynamics of capital. Minutes from the Federal Reserve's FOMC meeting released this week also reveal that officials remain divided on whether AI-driven inflationary pressures will broadly transmit through the economy, with no consensus yet formed.

Beware the "Bessent Put" Backfiring: Suppressing Long Yields Could Rebound on the Yen

The report specifically warns that Japan should treat the failure of the US "Bessent put" as a lesson rather than remaining detached. The yen remained weak this week, but Japanese equities 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 yields climbed 5 basis points, but Japan's 10-year government bond yield actually fell 3 basis points – a divergence partly reflecting shifting market expectations of Japanese policy.

The problem is that if Japan follows the US lead in suppressing bond yields through supply-side tools like reducing long-dated issuance, the side effects could emerge in the form of yen depreciation. Given that the Bank of Japan holds nearly 50% of JGBs, its control over the bond market is far stronger than the Fed's, but this also means market distortions may be more prominently reflected in the exchange rate.

More troubling still, the yen is already a weak currency, unlike the dollar's status as a key reserve currency. Matsuzawa draws parallels between the current environment and the Asian currency crisis that 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 quite high. In this context, he argues that Japan should at minimum explicitly renounce large-scale anti-inflation policy credit, which is the minimum necessary condition to stabilize market expectations.

BOJ Rate Hike Expectations Heat Up, AI Capex Intensifies Credit Market Scramble for Funds

This week, market pricing for BOJ rate hikes intensified: the probability of a September hike rose to approximately 80%, with expectations already factoring in three future hikes and a terminal policy rate of 1.75%. The 2-year forward OIS for Japan's terminal rate also rose from 2.19% to 2.23%. The BOJ's recent communications have indeed leaned hawkish, with markets even beginning to discuss an accelerated pace of tightening.

However, Nomura believes the Japanese economy still retains some resilience, and while Deputy Governor Himino's remarks may reinforce September hike expectations, they do not necessarily signal a commitment to a faster tightening cycle. With markets already highly priced for this scenario, even a September hike may not constitute a new positive catalyst.

Of greater concern is the competition for capital between tech corporate debt and government bonds. Credit default swap spreads for some hyperscalers have risen to historical highs, reflecting market worries that massive AI capital expenditures are squeezing corporate financing capacity. AI's heavy capital demands are transmitting into the credit market, competing with government bond issuance for funds. While the US earnings season has further validated AI investment's support for corporate profits and capex, sustained pressure on tech corporate debt could alter financing costs and risk appetite, potentially feeding back into equity markets. Whether tech corporate bonds can stabilize will be a key external indicator for whether stocks can hold their ground next week.

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