Summary of the Key Points
U.S. Treasury Secretary Janet Yellen recently deployed two “market-stabilizing measures”: on one hand, she issued a stern warning to traders not to short the Japanese yen, which directly drove up the yen’s value; on the other hand, she announced a tripling of the scale of single Treasury bond repurchases in an attempt to curb the soaring long-term interest rates on U.S. debt. While the yen did rise, U.S. Treasury bond prices fell even more sharply, with long-term interest rates reaching their highest levels in nearly two years. These two actions combined to strike two critical weaknesses in the U.S. stock market’s four-year bull run, leading to three consecutive days of declines. Yellen is now in a difficult position, criticized by the market as being a “useless ally” to the stock market.
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Detailed Analysis
1. What were Yellen’s initial intentions behind these two moves?
Yellen was essentially taking over a situation that was already in disarray. Her actions were aimed at “stabilizing the overall market”: long-term U.S. Treasury bond interest rates were rising out of control—higher interest rates meant more profits for those buying risk-free bonds, so why would anyone invest in riskier stocks? The U.S. stock market, which had relied on low interest rates for four years, was on the brink of collapse. Meanwhile, the yen had depreciated significantly, and the Japanese government was struggling to maintain its position. If pushed too far, Japan might have resorted to selling its massive holdings of U.S. bonds to intervene in the currency market, which could have triggered a collapse in bond prices and led to even higher interest rates.
Yellen’s plan was to achieve two goals: first, to send a strong signal to the market to prevent the yen from falling further, thus avoiding a rush by Japan to sell its bonds; second, to use government funds to buy U.S. bonds, thereby stabilizing bond prices and interest rates, and indirectly preserving the stock market bull run.
2. Why was the bond repurchase effort criticized as “using a pea shooter to fight a tank”?
The failure was due to Yellen’s actions falling far short of market expectations. She had previously hinted that the repurchase amount would exceed $4 billion, and Wall Street expected her to spend $8 to $10 billion on each purchase. However, the actual amount announced was only $6 billion. This was a drop in the bucket compared to the massive amount of new U.S. debt issued each year; it felt as if she was only offering a fraction of what was needed. The market saw this as a lack of commitment and became even more panicked, leading to a rush to sell U.S. bonds. As a result, 10-year Treasury bond interest rates soared to their highest level since October 2023.
Even Yellen admitted that she could not change the overall market trend and could only try to minimize the volatility. Currently, there are no factors that would help lower bond interest rates: oil prices are still rising, inflation is not declining, the likelihood of the Federal Reserve raising interest rates next week is 62%, and companies are in a peak period of debt issuance, leaving no extra funds available to support bond purchases. Her limited repurchase efforts were utterly insufficient.
3. Why did the rise in the yen turn into a “time bomb” for the U.S. stock market?
This is related to an invisible rule that has supported the U.S. stock market’s growth over the past decade: yen carry trading, which essentially involves borrowing yen at low interest rates in Japan to invest in high-yielding U.S. assets. For years, Japanese yen interest rates were almost zero, allowing traders to borrow a large amount of yen at low cost, convert it into dollars, and then invest in high-yielding U.S. assets like AI technology stocks or Treasury bonds, earning a profit from the difference. A significant portion of the momentum behind the stock market’s growth in recent years came from this strategy.
With the yen appreciating, borrowers now need to spend more dollars to convert back into yen to repay their debts. For example, if someone borrowed 1 million yen in early 2024 (at a rate of 1 dollar = 160 yen), and used that to buy Nvidia stocks for $6,250, they would now need to spend $6,535 to repay the loan (at a rate of 1 dollar = 153 yen), incurring an additional cost of nearly $300. With leverage, such a small exchange rate fluctuation could wipe out all profits or even lead to a margin call, forcing traders to sell their stocks and convert them back into yen to repay the debt. This is why AI technology stocks were among the first to suffer during the market decline.
4. Yellen is now in a dilemma; any choice she makes seems wrong
Her initial logic was: “boost the yen → Japan won’t need to sell bonds → less pressure on U.S. bonds → I can stabilize bond prices with my purchases → ultimately preserve the stock market.” However, things have gone completely opposite. Her limited repurchase efforts have only pushed interest rates higher, and the rapid appreciation of the yen has led to a rush of traders selling U.S. stocks to repay their debts, causing a market crash. At the same time, Japanese investors, seeing the yen’s rise and anticipating interest rate hikes by the Bank of Japan, have also started selling U.S. bonds to earn higher returns in Japan. This has increased the pressure on U.S. bonds. Now, Yellen is caught in a dilemma: if the yen appreciates too slowly, Japan may be forced to sell bonds, leading to a collapse in the U.S. bond market; if it appreciates too quickly, carry traders will liquidate their positions, further damaging the market. Her two attempts to stabilize the market have instead hit two critical vulnerabilities, earning her the label of a “useless ally” to the stock market.