Transcript of THE $88B JAPAN WITHDRAWAL: Why Bessent’s Bond Buyback Just Blew Up!
Wall Street Truthbombs
0:00The largest foreign lender to the United0:02States spent August selling. And this0:05week, the United States Treasury went0:06into the market to buy its own bonds0:09back. By the end of this video, you're0:11going to understand exactly why the most0:12talked about quote in finance this week0:15is also the most misunderstood one. And0:18why a currency fight on the other side0:20of the world is showing up in the rate0:22on your mortgage right as we speak. My0:24friends, this isn't a Japan story. It0:27never was.0:29There is this currency exchange window0:32in the lobby of this hotel in the0:34financial district right near my office0:36downtown and they still post it right on0:38a little whiteboard. There are a lot of0:40whiteboards in Manhattan. What can I0:42tell you? That's a fact. Listen, I walk0:45past it most mornings and last week the0:47yen line had been wiped and rewritten0:50twice before 9:00. The guy behind the0:53glass, well, he looked pretty annoyed.0:54And I know what you're thinking.0:56Everyone in New York looks annoyed, but0:57he had a real good reason to be annoyed.1:00He should have. He He was marking a1:02market that two governments had decided1:04to get into personally. So, here's the1:08surface story, and it's a great one. On1:10Tuesday of this week, at the Cox School1:13of Business at SMU, Treasury Secretary1:16Scott Bessant looked at the currency1:18market and said this. I'm going to quote1:20this now. I am the House now. So when we1:24intervene with the Japanese yen, I have1:27pretty good insight. And then get this,1:30he told traders that they could bet1:32against them if they had the guts to.1:35Wow, that's the stuff for books, if not1:37movies. And that's about as direct, my1:40friends, as a Treasury Secretary can1:42get. And [snorts] the tape says, well,1:44he's winning. The yen was at roughly 1641:48to the dollar in late July, its weakest1:50level in about 40 years. It's around 1541:54now. That's a move of more than 6% and1:57it's the strongest the currency has been1:59in roughly I think about seven months or2:01so. And on July 31st, the United States2:04did states did something genuinely rare.2:06The Treasury sold euros out of its own2:09reserves and bought Japanese yen. You2:11may recall that. I reported a lot about2:13that. The last time Washington2:15intervened to prop the yen up was in2:171998, the year my son was getting2:20married next month was born. So when the2:23headlines say historic, they're not2:26exaggerating for once. And why would2:28Washington care about the price of2:30somebody else's currency? Well, Besson's2:32own answer was that a stable yen is not2:35only for important for the United2:36States, okay, but very important for the2:39entire region. Worth noting, the United2:43States didn't step in for Japan once.2:45Excuse me. They did step in once more2:47recently than that 1998. That was back2:50in 2011. That was right after Fukushima.2:54But that operation ran in the opposite2:56direction. Washington was helping push2:58the yen down at that point. This time3:00though, it's helping to hold it up. Same3:03partners, opposite problem. That's a3:05story that every feed is carrying right3:08now. the swagger, the quote, the chart3:11going the right way and every bit of it,3:13well, it's true, my friends. We're going3:16to dig deeper right now. And if you have3:18a yen for this type of stuff, uh you3:21better uh click like and don't forget to3:23subscribe because it's important to be3:25in the know about this stuff. It impacts3:26you and this is where you learn all3:28about it. Okay, nobody's asking the only3:31question that actually matters right3:32now. Where did Japan get the dollars?3:35Because to buy yen, you have to well,3:37you have to sell something else. And3:39Japan's finance ministry spent 15.43:42trillion yen. That's about roughly 193:4598.6 billion defending its currency3:48between July 30th and August 26th.3:51That's the largest single month3:53intervention on record. Not the largest3:55in a decade on record. Now look at the3:58reserve account. Japan's foreign4:00reserves fell by 79.6 billion in August.4:03the biggest drop they have ever posted4:06down to 1.208 trillion and the line4:08inside the account that did most of the4:10damage was foreign securities. That line4:14fell by nearly $88 billion in a single4:16month. About 70% of Japan's reserves are4:19held in, get this, United States4:21government debt. Japan is the largest4:23foreign holder of treasuries on the4:26planet. When that line drops by 884:28billion in 30 days, you're looking at4:30the biggest buyer of an American4:31government debt acting like a seller. I4:35want to be precise here though because4:37this is exactly the kind of story that4:39gets a little bit oversold. Nobody has4:41confirmed outright Treasury sales.4:44Bloomberg says it's likely. The Japan4:47Times says also that it's likely. And4:49there's a Federal Reserve facility that4:51lets foreign bank central banks raise4:53dollar against their treasury their4:55treasury holdings without actually4:57selling them outright. So this is just5:00an inference. It's a strong one because5:02treasury prices were broadly uh steady5:04that month which means the decline looks5:06like sales and not like falling values.5:09But it's an inference and you deserve to5:11hear it called out as one. Okay. You got5:15to understand what an intervention5:17physically is because the word also5:19makes it sound like policy when my5:21friends it's actually a trade. A central5:24bank doesn't wish a currency higher. It5:26walks into the market with real money5:28and it buys. That money though, it has5:31to come from somewhere in the reserve5:32account which means every dollar of5:34support for the yen is funded by selling5:37something else. And that something else5:39is almost always the biggest and most5:41liquid thing in the drawer. And what do5:43you think that is? Ours right now.5:46Here's the shadow data. You know, I love5:48the shadow data. That's the thing that5:50I've not seen a single outlet, and I5:52watch them all put side by side. In5:54August, Japan's foreign securities5:56position dropped nearly 88 billion, as I5:58just told you. In that same stretch, the6:00United States Treasury announced that it6:02was ramping up its bond buyback program.6:05You might remember that just a few days6:07ago. And on August 19th, it doubled its6:09long and liquidity buybacks from two6:11billion per operation to at least four6:14billion. And this week, it went further6:16and announced purchases of up to 66:19billion of 10year to 20-year bonds.6:22That's triple the normal size, my6:23friends. Put the two numbers next to6:25each other. The seller was roughly 146:27times the size of the buyer. And the6:30buyer, well, the buyer's the issuer. So,6:33what happened when Treasury stepped in?6:35Well, the opposite of what was supposed6:37to happen. Yields actually went up. The6:4010-year touched 4.85%, its highest level6:42since October of 23. As I'm recording6:45this, and I'm looking at my screens over6:47here, the 10year is at 492, 4.92%, and6:51the 30-year is at 5.32%.6:54And the street said it said said it6:56pretty loudly. There is roughly $ 326:58trillion of security, Treasury7:00securities outstanding. 32 trillion. A7:03$6 billion buyback against that is a7:07rounding error. Someone over at7:08Bloomberg Intelligence said that you'd7:10need maybe 10 billion or more per7:13operation to matter. And somebody over7:15at BNP Paribach called it a band-aid.7:19And a Deutsche Bank analyst put it best.7:21Uh he said that Treasury created this7:24monster that it now has to keep feeding.7:27Actually, I read something this morning7:28where somebody said, "The Treasury7:30operation is more like bringing a7:32peashooter to a tank battle." That's7:35hilarious. There have been some pretty7:37good quotes out there on the tape. Now,7:40sit with that uh sentence for just a7:42second. The issuer of the debt is now7:44also a buyer of debt, and the market has7:46already decided the bid is far too small7:48to give it any real respect. Let me ask7:51you something. If your largest customer7:54started selling your product back into7:55your own market, would you fix it by7:58buying a rounding errors worth of it7:59yourself and making a confident speech8:01about it? Okay, here's act three, and8:04this is where the trending conversation8:06is genuinely backwards. The yen is not8:09recovering because a Treasury secretary8:12dared traders to fight him. Is8:15recovering because the rate gap that8:16created the weak yen in the first place8:18is finally starting to well, it's8:20starting to close. The Bank of Japan8:22meets on September 17th and 18th. Its8:25policy rate is now at 1% and that is the8:28highest since 1995 after a hike in June.8:31Uh and Kyoto reports the board is8:34actually preparing to take it to 1 and8:36a4%. The stated reason is almost word8:39for word for our own problem. It's8:41rising oil prices and a weak currency8:44pushing imported inflation higher than8:46expected. Now look at the calendar. Our8:50FOMC meets on Tuesday and Wednesday,8:52September 15th and 16th, with a target8:55range of three and a half to 3.75%8:58and market odds of a hike running around9:00well north of 60%. The Bank of Japan9:03decides the very next day. Two central9:06banks tightening into the same energy9:07shock one day apart. And this is the9:10mechanism that nobody is really9:12explaining to you. For 30 years,9:14Japanese capital had nowhere to go at9:17home. So guess what? It came here and9:20bought US bonds. That was a structural9:22bid under the Treasury market that9:24exists and it was essentially free money9:26for the United States for all that time.9:28When Japanese yields rise, the money has9:31a reason then to stay home, not have to9:34come over here. The intervention is the9:36headline. The repatriation, that's the9:39trend. And the trend, well, I'm sad to9:42say, it's the one that lasts. And that9:44gap is what built the trade that broke9:46the yen in the first place. For years,9:49you could borrow in yen for almost9:51nothing. You can convert it to dollars9:53and earn whatever our short end of the9:55yield curve was paying. That is the9:57carry trade. And it is one of the most9:59crowded positions on the planet. Works10:02beautifully until it doesn't when the10:05borrowing side gets expensive. Every10:07quarter point the Bank of Japan adds10:09raises cost of carrying to that10:11position. And credit trades, well, in10:14case you haven't figured it out by now,10:16they don't unwind politely. They unwind10:19all at once, violently. So, why does any10:22of this reach you and me? Because the10:2510-year Treasury is what prices your10:27mortgage? The 30-year fixed average at10:30is run around 6.71% in the weekly10:33survey, and daily quotes are already10:35running near 6.8% rapidly going towards10:387%. Every basis point that a foreign10:41central bank adds to our long end by10:43selling shows up in a monthly payment in10:46Ohio. Watch out millers, here it comes.10:49Nobody voted for that. Nobody even10:51announced it. Let me give you the honest10:53other side because you know I like to10:56give you both sides here. Japan is not10:58the only thing pushing yields up. And I11:00got I'm not going to pretend this brand11:02crude is above 100 bucks for the first11:04time in quite some time. August11:06wholesale inflation came in at 4/10en of11:09a percent for the month and 5.4% for the11:12year. We learned that Thursday, the11:14fastest of 2026. And corporate issuance11:17is at records with AI related borrowing11:20alone above 1.5 trillion. I have11:23reported that here many times. Japan,11:27it's only one hand on the scale. It's11:29not the whole scale. Anyone telling you11:31otherwise is selling you something. So,11:34what do you watch from here? Two things,11:36and they're both pretty simple. Watch11:38whether Japan has to has to intervene11:41again because a second round means well,11:43the first one didn't work. And watch11:45whether the US Treasury has to raise the11:48buyback again. If 6 billion becomes 1011:51billion becomes more, that is not11:53strength. That is a bid that has to keep11:56getting bigger to stand still. So, your11:59truth bond for today is this. Besset12:02said he is the House, but the House,12:04well, just watched its biggest depositor12:07withdraw 88 billion in a single month12:10and answered with a $6 billion chip. And12:14the bond market counted both stacks12:16before he even finished the sentence.12:19Join me every day for Wall Street Truth12:20Bombs, where I drop them right here12:22before the market figures them out.
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