Late at night, market alarm bells ring loudly

Source: Wall Street Intelligence Circle

The market movement last night can be summed up in four words—“alarm bells ringing.”

The first “bell rings”:

The 30-year US Treasury yield rose to 5.19%, reaching the levels seen on the eve of the 2007 global financial crisis. Bond markets in Europe and Japan also saw declines, with the selling pressure spreading to US equities. Tuesday’s selloff was not triggered by a surge in oil prices (oil only rose slightly that day) or other news, indicating heightened market tension, as risks are being reassessed. A drastic decline without news is the “moment of honesty” after the market dispels all excuses.

The second “bell rings”:

The US stock market fell, but not dramatically. The Dow Jones dropped 0.65%, the S&P 500 fell 0.67%, and the Nasdaq lost 0.84%. US Treasury yields are already at dangerously high levels, yet the stock market only posted a symbolic drop, completely lacking the expected panic. This mismatch isn't because the market is truly “invulnerable,” but due to “passive stability” (AI heavyweights hold such a large index share they can forcibly support the index). Traders view a 30-year US Treasury yield at 5.25% as the level where stocks begin to sell off.

The third “bell rings”:

The USD/JPY is relentlessly closing in on the 160 level, which is where Japan previously intervened. At the end of April (April 29 and 30), the Japanese government just intervened at the 160 threshold with about $65 billion (there were even rumors it may have used as much as $100 billion) for a massive intervention, pushing the exchange rate back to around 152. Yet, less than three weeks later, the USD/JPY is once again approaching 160.

What’s different this time is that the surge in US Treasury yields has tied Japan’s hands. Soaring US Treasury yields not only drain liquidity from the yen, but also, from a macro perspective, strip the Japanese Ministry of Finance and the central bank of their tools. Japan has one of the largest foreign exchange reserves in the world (about $1.4 trillion), but most of it is not cash—it’s in US Treasuries. For Japan to obtain hundreds of billions of US dollars in cash to intervene in the forex market, they would have to sell a large amount of their US Treasuries, which could trigger a disastrous chain reaction: to save the yen by dumping Treasuries in the market would directly push up US Treasury yields, attracting more capital to sell yen in exchange for ultra-high-yielding Treasuries, causing even more depreciation pressure on the yen. Japan’s only hope now is joint intervention—asking the US Treasury and the Federal Reserve to join forces, selling dollars together on the New York forex market alongside Japan.

The issue now is no longer fluctuations in single assets; several of the most critical “markets” in the global financial system are now becoming unstable at the same time.