Yen carry trade unwind, inflation in Japan, hit to the NASDAQ, AI bubble pops, Japanese investors pull money back home and Treasuries lose its largest foreign creditor. Who knows what happens next.
What happens next is that US Treasury yields go to the moon, making previously bought treasuries nearly worthless. Most bank deposits in the US are instantly used to buy treasuries, so severe devaluation of those less-than-mature bonds on the secondary markets means that money held by banks is not really there. Should there be a larger than average number of people making withdrawals, bonds would be dumped on the secondary for pennies on the dollar. Bank runs, complete financial collapse, etc. Enjoy.
BTW, this is exactly what happened to Silicon Valley Bank in 2023 on a smaller scale.
I’m not talking about raising interest rates. I’m talking about uncontrollable increases in treasury yields due to the biggest holder of US treasuries selling them off.
What I find more interesting though is a recent comment by the Treasury Secretary that deflation in Japan has "stopped". If that is true, then doesn't the yen carry trade unwind automatically? Kicking off the above cycle in the U.S.? It's only a matter of time, hence the need to expand the repo market as soon as possible.
But this presents so many more problems, because that repo market is meant to be used for short term funding, not refunding foreign creditors over long term debt. It also implies that the normal mechanisms to provide liquidity to Japanese investors and institutions who pull money out of the U.S. is not exactly solvent to the point to be able to do so. Hence, again, the need to expand the repo market.
So now, depending on how fast the yen carry trade unwinds, and how fast money moves back to Japan, combined with the fact they will likely stop funding further issuance of debt, all leads to a very bleak picture.
Comments
Yen carry trade unwind, inflation in Japan, hit to the NASDAQ, AI bubble pops, Japanese investors pull money back home and Treasuries lose its largest foreign creditor. Who knows what happens next.
US Treasury just bought about $10 billion worth of Yen
Because otherwise Japan would have sold Treasuries to plug its financial gaps and defend the Yen, which would have increases US bond yields.
Is the US Treasury now on the hook every time Japan feels a bit antsy about its finances?
Praise FSM. Without circular investments we'd all be broke.
Finally a new type of circular financing to talk about!
Using Euro's apparently.
What happens next is that US Treasury yields go to the moon, making previously bought treasuries nearly worthless. Most bank deposits in the US are instantly used to buy treasuries, so severe devaluation of those less-than-mature bonds on the secondary markets means that money held by banks is not really there. Should there be a larger than average number of people making withdrawals, bonds would be dumped on the secondary for pennies on the dollar. Bank runs, complete financial collapse, etc. Enjoy.
BTW, this is exactly what happened to Silicon Valley Bank in 2023 on a smaller scale.
You write as if nobody has ever raised interest rates before and this is some unprecedented event that no bank could be prepared for.
I’m not talking about raising interest rates. I’m talking about uncontrollable increases in treasury yields due to the biggest holder of US treasuries selling them off.
Isn't that when the Fed stepped into the reverse repo market in order to allow the banks to extend and pretend?
The repo market angle is an important one. Not sure if this has been as widely reported but they want to expand the repo market to directly support the yen intervention: https://www.cnbc.com/amp/2026/08/03/bessent-fed-japan-yen-fi...
What I find more interesting though is a recent comment by the Treasury Secretary that deflation in Japan has "stopped". If that is true, then doesn't the yen carry trade unwind automatically? Kicking off the above cycle in the U.S.? It's only a matter of time, hence the need to expand the repo market as soon as possible.
But this presents so many more problems, because that repo market is meant to be used for short term funding, not refunding foreign creditors over long term debt. It also implies that the normal mechanisms to provide liquidity to Japanese investors and institutions who pull money out of the U.S. is not exactly solvent to the point to be able to do so. Hence, again, the need to expand the repo market.
So now, depending on how fast the yen carry trade unwinds, and how fast money moves back to Japan, combined with the fact they will likely stop funding further issuance of debt, all leads to a very bleak picture.