Summary of Key Points
U.S. Treasury Secretary Janet Yellen has recently taken a series of aggressive actions, including coordinating with Japan to intervene in the foreign exchange market, adjusting expectations for U.S. debt issuance, and supporting Federal Reserve Chairman Jerome Powell, in an attempt to prevent long-term U.S. bond yields from continuing to rise (the 30-year yield has reached a 19-year high of 5.27%). The primary goal of these measures is to prevent foreign holders, such as Japan, from selling U.S. bonds and avoid a collapse in the U.S. debt market. However, the market generally believes that the effects are limited—long-term yields remain high, and structural issues (stubborn inflation, large deficits, and geopolitical conflicts) make it extremely difficult to stabilize the situation.
1. Why Is Yellen So Concerned About Rising U.S. Bond Yields?
U.S. bond yields are essentially the “lending rates” for the U.S. government; the higher the yields, the more expensive it is for the government to borrow money. The current 30-year yield hitting a 19-year high means that the U.S. will have to pay significantly more interest over the next 30 years, which will put pressure on expenditures on education, infrastructure, and other areas. Additionally, corporate and mortgage loan rates are also likely to rise, dragging down the economy.
More importantly, Japan is the largest foreign holder of U.S. bonds (over $1.1 trillion). If the Japanese yen continues to depreciate, Japan may sell its U.S. bonds to buy dollars in order to stabilize its exchange rate, which would increase the supply of U.S. bonds and drive down their price, further boosting yields (bond prices and yields move in opposite directions). All of Yellen’s actions are aimed at breaking this cycle: yen depreciation → selling of U.S. bonds → soaring bond yields.
2. Yellen’s “Combination of Measures” to Stabilize U.S. Bonds
1. Coordinating with Japan to Intervene in the Foreign Exchange Market (A Note Reveals the Truth)
Yellen and Japan worked together to buy yen and sell dollars, hoping to strengthen the yen. However, instead of using dollars (which would have raised U.S. bond yields), they exchanged euro reserves for yen, thus helping Japan stabilize its exchange rate without directly affecting U.S. bond prices. A note stating “buying $5-10 billion in yen” directly revealed that the United States was behind the initiative.
2. Expanding the FIMA Mechanism to Prevent Japan from Selling U.S. Bonds
The FIMA mechanism acts as a sort of “U.S. bond pawnshop,” allowing foreign central banks to borrow dollars using their U.S. bonds as collateral without having to sell the bonds themselves. Yellen called for expanding this mechanism, signaling to Japan that it could borrow money directly if needed, thereby cutting off the link between yen depreciation and the sale of U.S. bonds.
3. Adjusting U.S. Debt Issuance Guidance to Suggest a Reduction in Long-Term Bond Supply
In the past, U.S. bond issuance has been on the rise; now, the Treasury Department has changed its language from “potential increase” to “potential change,” implying that there might be a reduction in long-term bond issuance. A decrease in supply could lead to higher prices and lower yields (for example, after reducing long-term bond issuance in 2023, yields fell from 5% to 4%).
4. Supporting Powell to Maintain the Fed’s Credibility
Powell has been questioned by the market for his vague communication on inflation control, which led to selling of U.S. bonds. Yellen publicly stated that Powell’s approach is intended to “detoxify” the market from relying too heavily on clear guidance from the Fed, essentially helping to reinforce Powell’s authority. If the Fed’s credibility were to decline, fewer people would be willing to buy U.S. bonds.
3. Limited Effect: Yields Have Not Fallen Much, and the Market Remains Bearish
Despite these measures, the 10-year U.S. bond yield has only dropped from 4.75% to 4.65%, and the 30-year yield remains above 5%. Experts generally believe:
- Union Bond Fund: Long-term yields will continue to rise due to the strength of the U.S. economy (e.g., AI investments, improving employment), and Powell’s vague communication could lead to greater market volatility.
-景顺 Strategy Advisor: It is recommended to reduce holdings of long-term bonds (10-year, 30-year) as yields are expected to rise further, causing bond prices to decline.
4. Structural Challenges Hindering Stability
Yellen’s efforts are only addressing the symptoms; the underlying problems remain unresolved:
- Stubborn Inflation: Inflation has exceeded the Fed’s 2% target for five consecutive years, requiring investors to demand higher “risk compensation” for buying long-term bonds, preventing yields from falling.
- Large Deficits: The U.S. faces an annual deficit of nearly $2 trillion, necessitating the issuance of large amounts of new debt. Even if long-term bond issuance is reduced, short-term bond issuance may increase, leading to higher short-term yields and overall higher financing costs.
- Geopolitical Conflicts: The U.S.-Iran conflict has pushed up oil prices, fueling inflation concerns and causing bond yields to rise.
5. What Should Ordinary Investors Do?
- Avoid long-term U.S. bonds: Yields are expected to rise, and bond prices will fall, resulting in losses.
- Prefer stocks: In a global environment of re-inflation, stocks offer more potential than bonds, especially sectors related to AI and consumption.
- Pay attention to short-term bonds: If the Fed does not raise interest rates, short-term bond yields may fall, but be cautious of volatility.
In summary, Yellen’s actions have temporarily stabilized market sentiment, but the long-term problem of high U.S. bond yields persists. Without resolving these structural issues, higher yields are likely to continue. Ordinary investors should avoid long-term bonds and not be misled by short-term rebounds.