U.S. Treasury’s Bid to Control Exchange Rates and Bond Yields Backfires Under Weight of $40 Trillion Debt

Bessent Moves to Halt Yen Slide, Issues Public Warning to Speculators
Scale and Staying Power of Intervention Questioned Despite U.S.-Japan Policy Coordination
Repricing of Fiscal Risks Could Spread Shocks Across Financial Markets and Real Economy

U.S. Treasury Secretary Scott Bessent has publicly warned speculators shorting the yen, likening himself to the “house” in a casino. Yet the enormous national debt and swelling interest burden are constraining the policy latitude of the United States and Japan as they seek to steer exchange rates and government bond yields toward desired levels. Indeed, when the Treasury Department’s expanded Treasury buybacks fell short of market expectations, long-term U.S. Treasury yields surged instead, accompanied by a weaker dollar and higher gold prices. A prolonged contest between policymakers and markets could transmit the shock across both the financial system and the real economy.

Bessent: “I Am Now the House, and I Know Japanese Policy Well”

According to Bloomberg on Sept. 8 local time, Bessent challenged yen short sellers at an event held that day at Southern Methodist University in Texas to “test” his resolve to drive the Japanese currency higher. Declaring, “I am now the house,” he emphasized that he possessed an informational advantage comparable to that of a casino operator. His remarks also served as a warning that market speculators and traders—the casino’s customers—would be playing a losing game by betting against the policies of the U.S. Treasury, the house itself.

Bessent expressed confidence, saying, “I know very well what the Japanese government and the Bank of Japan will do when intervening in the Japanese yen, and what Japanese policymakers will do. If you want to bet against me on a weaker yen, go ahead.” He added, “Every time people say, ‘The Treasury secretary is taking a risk,’ that is the situation I have dreamed of,” adding, “I have asymmetric information.”

U.S. and Japan Join Forces After Yen Hits 40-Year Low, but Joint Intervention Delivers Only Fleeting Lift

The remarks are widely viewed as an extension of the unusual joint market intervention undertaken by the United States and Japan in late July. After the yen plunged to its weakest level against the dollar in 40 years, the U.S. Treasury coordinated with the Japanese government to intervene in the market through yen purchases. The Treasury also converted its euro holdings into yen.

The yen initially surged following the joint intervention, but subsequently surrendered part of its gains. The reversal reflected mounting market recognition that the U.S. Treasury had limited capacity to finance foreign-exchange purchases. The yen later advanced sharply to near its highest level of the year without any conspicuous additional intervention by authorities, as expectations of a Bank of Japan rate increase strengthened. Last month, Bessent also announced large-scale buybacks to contain the surge in U.S. Treasury yields, but neither the buyback program nor the joint yen purchases produced a substantial effect.

Bloomberg noted that “Bessent’s remarks show his unusually deep involvement in economic policymaking in Japan, one of the world’s largest holders of U.S. Treasuries.” Lee Hardman, senior currency analyst at Mitsubishi UFJ Financial Group (MUFG), said Bessent’s remarks would reinforce market expectations that Japan had agreed to adjust domestic policy to support a stronger yen and facilitate further joint U.S.-Japan intervention.

Bessent’s Forceful Warning Signals an Increasingly Anxious Treasury

Forceful warnings from policymakers are regarded as a necessary instrument for stabilizing financial markets. If authorities adopt an ambiguous stance when an exchange rate is moving overwhelmingly in one direction, markets may interpret it as a weakening commitment to intervene. Japan’s Ministry of Finance and the Bank of Japan have previously escalated verbal intervention in stages before entering the market directly to halt yen selling. Bessent’s public emphasis on U.S.-Japan coordination and his informational advantage was likewise calculated to preempt additional inflows of speculative capital.

However, an aggressive response can backfire when markets are positioned to exploit the authorities’ vulnerabilities. The United States must simultaneously contend with national debt of $40 trillion, a massive fiscal deficit, growing Treasury issuance and a surge in international oil prices caused by the Iran War. Against this backdrop, repeated assertions by the Treasury that it will defend bond prices could be interpreted as a sign that policymakers have become desperate because they cannot withstand a sharp rise in interest rates. At that point, rather than unwinding their short positions, speculators may intensify their selling to test the amount of capital the Treasury can actually deploy and the extent of its response capacity.

Table 1. Expansion of U.S. Treasury Buybacks and Market Reaction

Treasury Yields Soar Despite $6 Billion Buyback

This type of counterproductive effect has already emerged in the U.S. Treasury market. On Aug. 19, Bessent abruptly announced that the volume of long-term Treasury buybacks would double from $2 billion per operation to at least $4 billion. The measure was scheduled to remain in effect from Sept. 9 through Nov. 4, the day after the midterm elections. When markets failed to stabilize following the announcement, Bessent warned in a CNBC interview on Aug. 20 that buybacks could exceed $4 billion per operation, declaring, “We have many policy tools.” On Sept. 9, as market attention on the size of the program reached its peak, the Treasury Department ultimately announced that it had set purchases of Treasuries with maturities of 10 to 20 years at up to $6 billion and would begin conducting them on Sept. 10. Wall Street had initially expected the Treasury’s threats to contain yields to translate into buybacks of as much as $10 billion. Even at $6 billion, the program amounts to only slightly more than 3% of outstanding Treasuries with maturities of 10 to 30 years.

The market response was consequently cold. Immediately after the announcement, the benchmark 10-year U.S. Treasury yield surged as high as 4.857% intraday, its highest level in three years since November 2023. The policy-sensitive two-year yield climbed to 4.432% intraday, surpassing its previous high set in January last year, while the 30-year yield—the benchmark for U.S. mortgage rates—jumped to 5.314%, its highest level since the 2008 global financial crisis. Because bond yields move inversely to prices, the increases signified a collapse in Treasury prices. The forceful policy signal had raised market expectations, but when the actual measure fell short, it reignited the Treasury selloff Bessent had sought to contain.

Debt-Burdened United States and Japan Face Limits to Market Intervention

The fundamental reason repeated attempts to stabilize U.S. Treasury yields have proved ineffective is the national debt approaching $40 trillion and the rapidly mounting interest burden. The Congressional Budget Office (CBO) estimates that the federal government’s net interest outlays will reach $1.039 trillion in fiscal 2026. That represents approximately 14% of total federal spending of $7.449 trillion, while the fiscal deficit over the same period is projected to reach $1.853 trillion. As maturing Treasuries are refinanced at higher rates, the fiscal capacity available for social welfare, defense and industrial policy diminishes. President Donald Trump’s repeated demands for policy-rate cuts and Bessent’s efforts to suppress long-term yields are widely interpreted as reflecting a determination to prevent that burden from increasing further.

Fiscal constraints also weigh heavily on Japan’s policy choices. According to Reuters, budget requests submitted by Japanese government ministries for fiscal 2027 reached approximately $931.4 billion, while the cost required for principal and interest payments on government bonds was estimated at a record $238.5 billion. As the assumed interest rate used in budget calculations rose from 3.0% to 3.8%, government bond-related costs also increased by approximately $34.9 billion from the previous year. Raising interest rates to curb yen weakness could lower import prices, but it would inevitably increase the government’s interest burden. Conversely, suppressing government bond yields could destabilize the yen once again and revive inflationary pressure. The more the U.S. and Japanese governments attempt to guide exchange rates and bond yields simultaneously toward their preferred levels, the narrower their room for policy maneuver becomes.

Greater Restraint, Stronger Market Resistance

If policymakers disregard this dilemma and attempt to hold interest rates artificially low, market resistance could spread from a small group of speculators to a broad spectrum of investors. Financial markets are governed by two competing maxims: “Even the finest warrior of the martial world cannot defeat the imperial army” and “The market is always right.” When one or two large hedge funds are destabilizing markets, policymakers can use liquidity, regulatory authority and direct intervention to repel the attack, but the situation changes when a broad array of investors—including pension funds, insurers, banks and asset managers—begins reassessing U.S. fiscal risk and demanding higher yields.

The buyer base in the U.S. Treasury market has indeed changed from the past. Reuters analyzed that long-term volatility has increased as price-sensitive investors such as hedge funds have filled the void left by price-insensitive buyers such as foreign central banks. Meanwhile, investment-grade corporate bond issuance is also rising sharply as Big Tech’s artificial intelligence (AI) infrastructure investment is projected to exceed $730 billion this year. If U.S. Treasuries and investment-grade corporate bonds compete for the same pool of long-term capital, the Treasury Department will find it increasingly difficult to disregard the yields demanded by investors. Moreover, the more policymakers attempt to suppress market rates, the greater the likelihood that capital will migrate into gold or overseas assets, destabilizing both the dollar and inflation.

The impact of elevated Treasury yields is already spreading to the weakest links in the U.S. credit market. According to the Financial Times (FT), the spread over U.S. Treasuries for American companies rated CCC or lower has widened from 8.08 percentage points a year ago to 10.53 percentage points recently. JPMorgan estimated that defaults among low-rated companies reached $40.1 billion this year, an increase of 9% from the previous year, while the recovery rate on defaulted bonds stood at just 29%, far below the 25-year average of 40%. Investment-grade companies with solid earnings can still raise capital on relatively stable terms, but highly indebted distressed companies must absorb the simultaneous increase in Treasury yields and credit spreads.