This week, US markets experienced a rare simultaneous downturn across equities, bonds, and the dollar. American stocks, Treasuries, and the greenback all weakened together, with the Japanese yen also failing to escape the selling pressure. This has led to growing skepticism about the Treasury Department's strategy of using bond buybacks and supply management to stabilize long-end yields.

According to Nomura Securities macro strategist Matsuzawa, the "Bessent put" — the market's assumption that Treasury Secretary Bessent's intervention would cap long-term yields — is losing its effectiveness. The policy moves haven't just failed to stabilize the bond market on a sustained basis; they've also intensified downward pressure on the dollar.

On Wednesday, the Treasury Department announced it would "at least double" its buyback program for 10- to 30-year Treasuries, just two weeks after the previous buyback plan was unveiled. However, market support from the policy lasted less than a day: long-end Treasury yields briefly dipped before rebounding quickly, ending the week roughly flat.

More concerning is that America's policy trajectory could serve as a cautionary tale for Japan. Matsuzawa warned that if Tokyo also resorts to bond supply management to suppress long-term financing costs, the pressure could shift from the bond market to the currency market, ultimately manifesting as yen depreciation. Should market confidence deteriorate further, this could trigger capital outflows and even risk reminiscent of the 1997 Asian financial crisis.

Bessent Downplays Inflation Risks, Raising Fears of a Harder "Behind the Curve" Correction Market interpretation of Bessent's maneuvers has been decidedly negative, with the dollar's reaction even more pronounced than Treasuries, weakening noticeably. The concern is that if the Treasury attempts to stabilize the bond market through supply-demand adjustments, the process of catching up with the "behind the curve" policy stance — which would typically require rate hikes — could be further delayed, potentially keeping monetary policy looser for longer.

Bessent has publicly stated that market inflation fears "don't align with fundamentals," arguing that current price pressures are mainly energy-driven and temporary in nature. This assessment may mean he underestimates AI's potential impact on economic growth, inflation, and the supply-demand dynamics of capital.

Minutes from the Federal Reserve's FOMC meeting this week also revealed that officials remain sharply divided over whether AI-driven inflation pressures will transmit broadly, with no consensus yet formed.

A warning has been issued that the "Bessent put" could backfire: suppressing long-end bond yields may end up destabilizing the yen. The report specifically cautions that Japan should view the failure of the US "Bessent put" as a lesson learned rather than remain an observer on the sidelines.

The yen remained soft this week, but Japan's equity market posted the steepest decline among G3 nations, falling 3.3%, while US and European stocks dropped 1.9% and 1.1%, respectively. Meanwhile, 10-year Treasury yields rose 1 basis point, European government bond yields climbed 5 basis points, yet Japan's 10-year JGB yield fell 3 basis points. This divergence partly reflects shifting market expectations regarding Japanese policy.

The problem lies in this: if Japan follows America's playbook and uses supply-side tools such as reducing long-dated bond issuance to suppress yields, the side effects could manifest as yen depreciation. Given that the Bank of Japan holds close to 50% of the JGB market, its control over the bond market is actually far stronger than the Fed's — but this also means market distortions may be more visible on the currency front.

What's more alarming is that the yen is already a weak currency, not a key reserve currency like the dollar. Matsuzawa draws a parallel between the current environment and the backdrop of the Asian currency crisis during the 1990s tech boom, warning that if Japanese policy goes astray, the risk of Japan transforming from a capital importer into a source of capital repatriation is considerably high.

Against this backdrop, he argues that Japan must at minimum clearly renounce large-scale policy credit aimed at fighting deflation — the bare minimum needed to stabilize market expectations.

BOJ Rate Hike Expectations Intensify as AI Capital Spending Intensifies Credit Market Competition This week, market pricing for BOJ rate hike trajectory has intensified: the probability of a September hike has risen to around 80%, with three future hikes now priced in, ultimately pushing the policy rate to 1.75%. The terminal rate expectation (2-year forward OIS) has also moved up 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 Securities believes the Japanese economy still retains some resilience, and Deputy Governor Himino's remarks may further cement September hike expectations, though they don't necessarily commit the BOJ to a faster tightening cadence. Therefore, with the market already pricing in a substantial amount, even a September hike materializing may not serve as a fresh positive catalyst.

In contrast, the more pressing concern is the competition for capital between tech corporate debt and government bonds. Credit default swap spreads for some hyperscalers have climbed to historical highs, reflecting market worries that massive AI capital expenditures are squeezing corporate financing capacity.

AI's heavy capital demands are transmitting into credit markets, competing with government bond issuance for funds. While the US earnings season has further validated AI investment's support for corporate profits and capex, if tech corporate debt markets remain under pressure, changes in financing costs and risk appetite could feed back into equity markets. Therefore, whether tech corporate bonds can stabilize will serve as a key external indicator for whether stock markets can hold their ground next week.

Additionally, Warsh's comments on balance sheet policy at the Jackson Hole symposium deserve close attention. If he signals continued balance sheet contraction and an aversion to injecting excessive liquidity into financial markets, it could further tighten liquidity conditions and pressure risk assets. His consistently cautious stance toward excessive liquidity distorting asset prices makes this risk particularly worth monitoring.