* "Free" markets
The merits, or otherwise, of a bigger state footprint in markets is worth debating. Treasury Secretary Scott Bessent is an ardent believer that the price of financial assets should be determined by private sector buyers and sellers, with no state interference, right? Well, maybe. His surprise decision to increase long bond buybacks, and justification for it, raise questions around that assumption.
Bessent's bond market intervention follows his even more surprising foray into the FX market recently to support Japan's yen. Meanwhile, the Trump administration has bought stakes in companies, ordered the purchase of $200 billion of mortgage-backed securities, tried to ban defense firms from buying back shares unless they speed up production, and called for a one-year cap on all credit card interest rates. 'Laissez-faire' or 'less fair'?
* Credibility
This raises the wider question of policy consistency and credibility. Bessent's forays into the bond and currency markets appear designed to halt the rise in long-term, market borrowing costs. Which is fine, but they are unlikely to have any durable effect if they're not part of a strategy to address the fundamentals forcing yields higher in the first place. Especially when Fed Chair Kevin Warsh has said bond yields are a useful guide for policymakers.
According to Bessent, the long end of the Treasuries curve doesn't reflect the "underlying fundamentals." But what are the fundamentals, if not five years of above-target inflation, near-record deficits excluding crisis and World Wars, and the federal debt double what it was a decade ago and now above $40 trillion for the first time? The recent surge in the term premium, towards its highest level in over a decade, suggests Warsh and Bessent have some convincing to do.
* Japan inflation
Japan's CPI inflation data is released on Friday, with consensus forecasts pointing to an acceleration in the annual core rate to 1.8% in July from 1.6% in June. That's still below the BOJ's 2% target, but the worry for policymakers will be potential pass through from producer prices - annual PPI inflation has shot up to over 7% from just 2% in February.
As Japan imports almost all its energy, this threat is not new, although the recent resurgence in oil prices - now up nearly 40% year-on-year - will be particularly unwelcome. Traders are putting a one-in-three chance of a BOJ hike in September, similar to the Fed, and have almost 100 bps of tightening priced by the end of next year. Given where the yen and long JGB yields are, is that about right?
