You can’t always get what you want (honey)

Washington wants three things. It can't fully have all three

1️⃣ Help Japan defend the yen, and keep Tokyo from selling Treasuries to do it

2️⃣ Stop long-term rates from rising

3️⃣ Defend the dollar

This is the context as of today: the 10-year yield has surged above 5.15%, which is a normal level in historical standards, but it’s the highest since 2007. The Fed just raised rates for the first time in three years. And the U.S. joined Japan in buying yen, its first such move with Tokyo in more than a decade. What Washington wants is 2% inflation, lower long rates and stable Yen.

With the three options mentioned above, these are the trade offs:

Option 1 is the cheapest. The Fed's FIMA repo facility lets Japan raise dollar liquidity without selling Treasuries. But intervention can cap the yen's slide without reversing it. The real driver is the rate differential.

Option 2 is the most expensive. Capping long yields through buybacks, QE or yield curve control while the Fed is hiking and oil is high means fighting inflation and easing at the same time. It would weaken the dollar, which undoes option 3, and it would put the yen under pressure again.

Option 3 is the Fed's job, and hikes do it. But higher U.S. yields widen the gap with Japan and push the dollar up against the yen, which works against option 1.

What’s likely to happen: the coherent package is 1 + 3, while accepting higher long rates. Use the plumbing (FIMA repo, joint intervention, Treasury's issuance mix and buybacks) to smooth disorderly moves, not to set the level. Fed credibility backs everything else. If nominal GDP in the U.S. is printing around 7% Long terms yields have some room to run up. But if they run up too much or too quickly, Bessent will be forced to intervene. And the deficit and the debt will be even more costly to maintain.

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