The US Treasury bought Japanese yen last Friday and again Monday morning in its first coordinated intervention in the currency since 2011, following Japan’s earthquake and tsunami. It is only the third such move since 1998. Treasury Secretary Scott Bessent confirmed the action: “Friday’s coordinated foreign exchange actions countered disorderly yen movements,” and pledged, “we will not hesitate to participate in further joint intervention.” While the trades are small, the message is clear. The US and Japan will no longer tolerate further depreciation of the .
Before the intervention, the yen was trading at 40-year lows versus the dollar. In our opinion, Bessent isn’t overly concerned about Japan’s currency; it’s likely rising yields in the US Treasury bond market driving his actions. Japan holds $1.15 trillion in Treasuries, making it the largest foreign holder on earth. Historically, when Japan defends its currency, it must sell its Treasuries to raise dollars to purchase yen, resulting in higher US yields. That helps explain one factor driving yields higher recently.
To help Japan accomplish these interventions, Bessent is pushing a little-known Fed tool, the FIMA (Foreign and International Monetary Authority) repo facility. The program allows nations to borrow dollars against their Treasury holdings instead of selling them.
We wrote a few articles and commentaries about the yen carry trade’s importance to global liquidity and saw how yen intervention can greatly impact markets in August 2024. With this intervention, Bessent is trying to manage that risk preemptively and prevent one of the largest buyers and holders of Treasury debt from becoming a forced seller.
Value Continues To Beat Growth
Value is overbought, and growth is oversold. The graphic below from the new “coming soon SimpleVisor.ai” shows that every value and small-cap factor is overbought, while every growth factor is oversold. The second graphic declutters the top graph to paint the same picture. and , which both jumped by about 15% on earnings last week, shrank the wider divergence between growth and value. While the rotation has certainly benefited value and small cap stocks, the relationships are not stretched to the point that we should expect it to flip soon. Simply, this trend may continue to favor value over growth before a rotation toward large-cap growth and technology occurs.
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