Besant’s "repurchase card" loses its effect—will next week’s two long-term bond auctions in Japan deliver another blow?

According to Zhitong Finance APP, Scott Besant, the U.S. Treasury Secretary, is facing an unexpected challenge from Japan as he attempts to lower yields by expanding long-term Treasury buybacks: next week, Japan will sequentially auction off 10-year and 30-year government bonds. In the context of persistent global fiscal concerns and a collective surge in long-term bond yields in major economies, if these two auctions see weak demand, it may further push up the yield of Japanese government bonds and, through the increasingly tight U.S.-Japan bond market linkage, transmit pressure to already near-twenty-year highs of long-term U.S. Treasury yields.

Recently, the world’s major debt markets have again faced sell-offs. Concerns over fiscal deficits and inflation are forcing investors to demand higher risk premiums. The U.S. 30-year Treasury yield fell by 4 basis points to 5.24% on Monday, but last week it once rose to 5.34%, hitting its highest level since 2007. The 10-year Treasury yield has risen about 70 basis points since March, now around 4.70%.

Europe hasn't been spared either. The yield on Germany’s government bonds of the same maturity issued this month set a 15-year high, and France’s borrowing costs rose to their highest since 2008. Japanese long-term government bond yields are also approaching record highs, with the 10-year yield rising to around 2.90%—its highest level in 30 years; the 20-year Japanese government bond yield is hovering near its highest level since 1996.

At present, the U.S. national debt has exceeded $40 trillion, and the cost of borrowing is rising rapidly, sparking market fears over a so-called “doom loop” — where a rising debt burden pushes up yields, and higher yields further increase fiscal pressure.

Naoya Hasegawa, Chief Bond Strategist at Okasan Securities, said: “Fiscal concerns and inflationary pressures are common themes facing Japan, the United States, and Europe. The rise in Japanese yields may have a global impact.”

Besant’s “Buyback Card” Temporarily Fails

Facing relentlessly rising long-end yields, Besant made an unexpected announcement last week to expand the U.S. Treasury’s buyback scale for long-term government bonds. According to the plan, starting September 9, each Treasury buyback operation will purchase at least $4 billion in government bonds, well above the current $2 billion. Buyback operations are planned quarterly, conducted once or twice weekly; operations are carried out by maturity, with each duration included once or twice per month.

Although the U.S. Treasury stated the expansion aims to provide better liquidity for the market, many analysts believe this move is essentially an attempt to control the steadily rising long-term bond yields. However, the market did not buy into this “buyback card.” After the announcement, Treasuries only rose briefly, with yields resuming their uptrend a day later. Many analysts and investors viewed Besant’s move as a failure, just like the previous coordinated U.S.-Japan foreign exchange market intervention, as bond prices quickly surrendered their gains.

U.S. President Trump later stated that Besant “unilaterally decided” to expand buybacks and was not acting under his directive. This somewhat undermined market confidence in the policy’s sustainability. Next, Besant is scheduled to speak locally on Monday, while Fed Chairman Kevin Walsh will appear Friday at the Jackson Hole Global Central Bank Annual Meeting. These two speeches may provide more short-term clues for the bond market.

The Japanese Auction Becomes the “Next Threat”

For Besant, a more direct challenge comes from Japan. On September 1, Japan will auction 10-year government bonds, followed by a 30-year government bond auction on September 3. This coincides with a global climate where investors are demanding higher premiums for government bonds; any sign of weak demand could spill over into the U.S. Treasury market.

Andrew Ticehurst, Senior Rate Strategist at Nomura Holdings in Sydney, said: “The market will closely watch the upcoming Japanese government bond auctions. If the auctions go poorly, Japanese yields will rise, making the local market more attractive to Japanese investors, thereby putting additional upward pressure on U.S. Treasury yields.”

In fact, this linkage already has precedent. Last year, the surge in Japanese super-long government bond yields directly transmitted to the U.S. Treasury market. Now, with the U.S. debt pile being so large and borrowing costs so high, the risks could be even greater.

Rinto Maruyama, Senior FX and Rate Strategist at SMBC Nikko Securities in Tokyo, said: “If next week’s Japanese government bond auction fails and triggers another round of sell-offs, I wouldn’t be surprised to see the spillover effect impact U.S. Treasuries. Despite Besant’s efforts, U.S. Treasury yields may still be pushed higher.”

It’s worth noting that the demand for the Japanese 20-year government bond auction on August 20 —the day after Besant announced the buybacks—was decent. But even so, yields at this maturity have still hovered near the highest levels since 1996, indicating that market demand was not strong enough to reverse the yield uptrend.

From Forex Market to Bond Market: Intensifying Expectations for U.S.-Japan Coordination

Besant’s bond market maneuver may not be solely a U.S.-only effort. Some analysts believe that U.S. attempts to curb bond yields could be a prelude to further coordination with Japan to jointly restore market stability, with the focus on both countries’ fiscal sustainability.

Kyohei Morita, Chief Economist at Nomura Securities, said: “The U.S. and Japan may jointly agree to commit to fiscal sustainability and send this signal to the market.” At the end of July this year, the U.S. and Japan coordinated a large-scale intervention in the forex market to support the yen, but the yen later surrendered much of its gains. Besant said at the time that such interventions required supporting policy measures, otherwise, they merely serve as a signal.

From a bond market perspective, the linkage between U.S. and Japan is tightening. The U.S. is likely to increasingly view Japan as one of the “epicenters” of global bond market volatility. Takahide Kiuchi, Executive Economist at Nomura Research Institute, noted in a report that in order to curb a stronger dollar, a weaker yen, and a rise in long-term bond yields, the Trump administration may pay even closer attention to Japan.

He wrote in the report: “If the 10-year Japanese government bond yield hits 3%, and the yen falls back to 160 against the dollar, the U.S. may request the Sanae Takaichi administration to shift fiscal policy direction.”

Reportedly, Japanese Prime Minister Sanae Takaichi has repeatedly voiced support for stimulus policies and advocated expanding investments in crisis management and growth areas. However, given that Japanese households are already facing cost-of-living pressures, such spending could further fuel inflation and raise doubts among markets about Japan’s fiscal discipline.

Although some Japanese officials argue that Sanae Takaichi’s fiscal policy is not “expansionary,” emphasizing that fiscal sustainability remains a priority, the government has so far not provided sufficient funding for certain significant economic measures, such as reducing the food consumption tax. This has intensified market concerns about Japan’s fiscal outlook.

Morita believes that if Japanese long-term government bond yields rise due to inflation concerns, some rate hikes will be necessary, and the Bank of Japan will act accordingly. However, he also pointed out: “Fiscal policy action is also needed to support the Bank of Japan’s rate hikes.” In other words, merely tightening monetary policy may not be enough to stabilize long-term yields—Japan also needs a more credible commitment to fiscal consolidation.