U.S. Treasuries, Yen, and Trade Risks Intertwined: Global Financial Conditions Face New Challenges

On August 24, Minneapolis Federal Reserve President Neel Kashkari stated that there are currently no signs of dysfunction in the U.S. Treasury market. The 10-year Treasury yield is close to 4.7%, which, while high, is not historically abnormal. Therefore, the Federal Reserve can still prioritize controlling inflation rather than adjusting policies in response to fluctuations in Treasury yields. This means that even if U.S. government debt surpasses $40 trillion, the Fed will not aim to stabilize the long-term bond market in the short term.

This stands in stark contrast to the Treasury's recent approach of lowering financing costs through expanded long-term bond repurchases. The Treasury aims to reduce long-end yields, but the Fed has not committed to providing policy support, so long-term yields are still primarily determined by inflation expectations, fiscal supply, capital demand driven by AI investments, and term premiums. If the Treasury's interventions cannot sustainably lower yields, it may further highlight the impact of U.S. fiscal fundamentals on bond market pricing.

Meanwhile, market bets on a Bank of Japan interest rate hike on September 18 have risen to about 82%, significantly up from before the July meeting, with the yen again approaching the 160 mark. If Bank of Japan officials signal further interest rate hikes before the meeting, it could push the yen to appreciate and increase the pressure for capital to flow back to Japan, further affecting global bond and risk asset allocations.

Additionally, the breakdown of U.S.-Canada trade negotiations and the increase in tariffs on Canadian goods have reignited supply chain and inflation risks. Against the backdrop of U.S. fiscal pressures, inflation risks from energy and trade, and the potential divergence in monetary policies between the U.S. and Japan, the market needs to focus not just on interest rate cut expectations but on whether global capital costs can stabilize. This week's Jackson Hole meeting will serve as an important observation window, as comments from Fed officials regarding inflation, long-term yields, and the Fed's policy framework will directly influence the pricing of the dollar, U.S. Treasuries, and risk assets going forward.

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