The stress test of the new Fed chairman is under way with the clear break of the 4.5% level on the US 10-year Treasury bond yield in recent weeks though bond volatility, as measured by the MOVE index, remains relatively low.
The 10-year yield is now 4.72%, while the MOVE index rose from a recent low of 65.4 on 2 July to 83.0 on 31 July and is now 71.0.
This writer agrees with those who have been arguing that the MOVE index has now become more important than the VIX in terms of monitoring rising aversion.
This is not only because of continuing evidence that “risk free” G7 government bonds are increasingly being priced on fiscal “supply” concerns and not just on traditional inflation and employment analysis.
It is also because bonds, particularly government bonds, are the key source of collateral in a highly leveraged system.
Meanwhile the upward pressure on bond yields has caused Treasury Secretary Scott Bessent in recent weeks to engage in actions which clearly demonstrate that he is trying to suppress yields.
This came, first, with intervention to support the yen and, second, with a stated willingness to increase repurchases of long-term Treasury bonds.
First, the US Treasury coordinated with Japan’s Ministry of Finance on 31 July to intervene to support the yen, the first such joint action since 1998.
This has been interpreted as a sign that the US is concerned about the growing repatriation risk in terms of Japanese institutions selling their holdings of Treasury securities of which they remain the largest holders globally.
Still, from this writer’s standpoint, it would have made much more sense for Bessent to have agreed to this only on the basis that the Bank of Japan would raise rates at the BoJ meeting in late July, which it failed to do.
A surprise rate hike, preferably of more than 25bp, combined with intervention, would have been much more likely to trigger a sustainable bottoming out of the yen.
There were two further signals which highlighted the Treasury Secretary’s rising angst on this issue of Japanese repatriation risk.
The first was his comment that it was “reasonable” for the Fed to consider increasing the size of its Foreign and International Monetary Authority (FIMA) repo facility with Japan (see Reuters article: “US Treasury’s Bessent: Reasonable for Fed to consider upsizing FIMA”, 4 August 2026).
The facility allows approved foreign central banks to raise dollars without selling their Treasury holdings in the open market. The current limit for the facility is US$60bn per counterparty.
An interesting point here is that FIMA is a credit facility introduced during the pandemic as a liquidity backstop.
It has nothing to do with forex intervention.
Such a flexible approach contrasts with recent talk about Federal Reserve Chairman Kevin Warsh’s stated desire to shrink the Fed balance sheet.
On that point the Fed balance sheet is, for now at least, still expanding, rising by US$195bn or 3.0% from the recent low of US$6.536tn in early December 2025 to US$6.73tn on 26 August.
This FIMA manoeuvre should be seen as a signal that Bessent is reluctant to see foreign central banks sell their foreign exchange reserves, a point also made by the distinguished economic historian Barry Eichengreen in a recommended article earlier this month (see Financial Times article: “The real message in the yen intervention”, 5 August 2026).
A further signal is that the Treasury reportedly funded the intervention to buy yen with euros not dollars (see Financial Times article: “US euro sale to prop up yen blindsided ECB”, 7 August 2026).
Bessent’s Second Tool: The US Treasury
Meanwhile, the negative market action of late as regards rising long term yields has also caused Treasury Secretary Scott Bessent to increase the buybacks of US long-term Treasury bonds.
On this point, the Treasury Department announced on 19 August that it would at least double the amount of long-term bonds it buys back.
The Treasury Department said it is increasing the size of buyback operations for longer-dated nominal bonds (the 10Y-20Y and 20Y-30Y sectors) from the current cap of US$2bn per operation to at least US$4bn per operation for the period between 9 September and 4 November.
When that did not work, in terms of calming down the bond market, Bessent was quick to state on 20 August that buybacks “could be more than the announced US$4bn per issue”, and when that still did not work anonymous “senior Treasury officials” were quoted as saying that the Treasury’s nearly US$1tn general account (TGA) could also be deployed to buy back Treasuries (see CNBC articles: “Bessent says Treasury buyback operation could be more than $4 billion”, 20 August 2026 and “Bessent could tap near $1 trillion Treasury General Account to fund bond buybacks, sources said”, 24 August 2026).
This latter development is a process which would be intrinsically inflationary, and also liquidity positive, as bank reserves would increase by the same amount as the TGA is reduced.
Inflation From the Iran Conflict Continues to Work Through the System
Meanwhile, the inflationary pressures from the impact of the closure of the Strait of Hormuz continue to work their way through the system.
US CPI and PCE inflation, which rose by 3.4% YoY and 3.7% YoY respectively in July, remain well above the 2% target, as they have been for the past five years.
Bessent has presumably already educated his political boss on the importance of the bond market given the sell-off in Treasuries triggered by the “Liberation Day” tariff announcement on 2 April last year.
This, and the approaching mid-term elections, is why the Trump administration has seemed focused of late on keeping the Iran conflict out of the headlines.
This is for good reason politically since the war remains extremely unpopular domestically judging by the polling data and the mid-term elections are not so far away.
A Reuters/Ipsos poll conducted between 21-24 August shows that 63% of Americans disapprove of US military strikes on Iran.
But the problem for the 47th American president remains that, while almost everybody agrees he wants an “out” for domestic political purposes, it is hard to conceive of a deal that Iran will agree to that Trump will be able to project as a “win” for the US on any credible basis.
Meanwhile any such deal will be contrary to the Israel agenda of continuing to push for regime change in Iran.
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