The Hedge Fund Toolkit Behind the Yen Intervention

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1:34Bloomberg Audio Studios. Podcasts. Radio. News. We're watching the yen quite closely, obviously. It's not gotten a huge game. The yen continued its recent slide on Monday, and that's in spite of a rare joint effort by the U.S. and Japan late last month to try to strengthen it. We are currently at 1, what is that, 158 on dollar yen. So the yen has given up half of the gains that it made since that intervention. The U.S. stepped in to prop up the Japanese currency for the first time since 1998. And that caught investors and central bankers by surprise. The intervention was spearheaded by U.S. Treasury Secretary Scott Besson, who cut his teeth as a macro trader working at hedge funds before he started his current job, effectively running the world's largest economy.

2:26For Besant, propping up the yen is more than the U.S. helping an ally. It's also something that could head off market moves that could result in higher interest rates in the United States. The last thing he wants is to see, you know, U.S. mortgage rates going even higher. Chris Antsi is a senior editor on Bloomberg's global economy team, and he points out Japan is the largest foreign holder of U.S. treasuries. Chris says that if Japan wants to prop up its own currency by buying yen, the dollars it needs to do so could come from selling some of its U.S. debt. The biggest foreign holder of treasuries dumping a bunch of their holdings, that's going to put pressure on 10-year treasuries, 30-year treasuries, and the 30-year fixed-rate mortgage.

3:09Besant's intervention may not be one and done. The Treasury Secretary recently asked the Federal Reserve to make a policy change that would let Japan borrow more dollars against its Treasury holdings without having to sell them. Previous Treasury secretaries were reluctant to intervene in currency markets, and investors are wondering how far Besant is willing to go. At the end of the day, you're sort of playing with the good faith and credit of the United States government. Bloomberg's Dan Flatley covers the Treasury Department. You know, the Treasury secretary is not supposed to act as a hedge fund manager.

3:42The Treasury secretary is supposed to act as the chief financial steward of the United States economy. So, you know, there are enormous stakes here. And so all's well that goes well until things go off the rails. Things are going fine now, seem to be, but that's not to say that is indefinite.

4:06I'm David Gurra, and this is The Big Take from Bloomberg News. Today on the show, Scott Besson's interventions in global currency markets. What impact are they having? and what's the endgame?

4:25All right, let me set the table here with you, Chris, to start. Over the last half decade or so, Japanese yen has weakened against the dollar. Five years ago, a dollar would buy you, say, 100, 110 yen. For the last half year or so, a dollar gets you more than 150 yen. For starters, what is wrong with a weak yen? Why does Japan want a stronger currency? Well, it wants a stronger currency because it has been flirting with the weakest levels in four decades. And at a time of elevated energy costs, right, they have to use a lot more yen to buy imported oil, fertilizer, all kinds of commodities. And the prices of those have already been rising, right?

5:09But it's rising even more in yen terms. So Japanese households and companies have seen their purchasing power really demolished. And Japan's interest rates have been coming up a little bit over the past couple of years, but they are still very, very low, around 1%. And their inflation is at least double that. So their real interest rates are negative. And that is imparting massive pressure all the time on the yen. Obviously, American interest rates much higher, closer to 4%. And if the Bank of Japan continues to be a laggard in raising interest rates, you're not going to see intervention really having a lasting effect.

6:02So you have Scott Besson, the Treasury Secretary, kind of surveilling the global economy, paying close attention to Japan. What do we know of why he decided it was wise for the U.S. to intervene at this point? There's a couple of things going on here. There's a geopolitical dimension to this, which is essentially sending a signal to the world that if you're a close U.S. ally, you are not only the beneficiary of potentially good trade agreements, defense agreements, other types of policy benefits, But you also have available to you the might of the dollar and the U.S. financial system to come to your rescue should you run into problems.

6:41And so I think that there's also sort of the exigencies of the job when it comes to defending the dollar's global role. So one of the things that Besant appears to have been contemplating was the fact that if Japan needed to defend the yen, it would have to sell U.S. treasuries. One of the fears is that if Japan were to sell a substantial portion of its holdings, that could lead to a rise in yields here in the United States, which would put upward pressure on things like mortgages and other things that are already sort of under upward pressure. And that's leading to obviously domestically a lot of questions about affordability and other things like that.

7:26So I think that's his primary concern there. Now, we don't have perfect visibility into his thinking around this, and he has said very little about the specifics of this operation. But basically what he has said is that Japan's economy is in much stronger shape than the market sometimes gives it credit for, and that technically the word is disorderly, that U.S. and Japanese officials stepped in to prevent disorderly selling in the market. And Chris, notably in this intervention, the U.S. didn't sell dollars to buy yen. It sold euros to defend the yen. Why was that? You know, as Dan said, the Treasury hasn't spelled out exactly what it did here and why.

8:08But the euro-yen cross is not very liquid, right? If you think about the$9.5 trillion a day foreign exchange market, right? The number one currency pair is euro-dollar. number two dollar yen. Euro yen isn't on the top 10 there. It's very, very illiquid. But if a market is illiquid, that means you can have a big price impact, right, with a relatively small amount. And if you're using billions of dollars, I can imagine that the impact is going to be pronounced. So part of it might have been he didn't want to sell dollars, put pressure on the dollar, potentially put pressure on treasuries, send long-term U.S.

8:55interest rates up. Chris, all of this makes me curious about this move more broadly. When you look at the pantheon of treasury secretaries, what's kept them from making these kinds of interventions? Well, the principle that U.S. treasury secretaries have embraced for many decades is one of freely set exchange rates, market-set exchange rates. And they generally don't like the idea of manipulation and going into the market. We saw in the Asian financial crisis, a bunch of Asian economies were maintaining currency pegs that didn't suit their fundamentals. And then when they broke, all of a sudden there was a massive crisis.

9:41So this philosophy of embracing hands-off, let the market do what it's going to do with currencies is deeply ingrained in the U.S. Treasury. Dan, I want to turn to you on, I'm hoping you can explain the way that the experience he had doing macro trading kind of could influence his perspective on the work he's doing now in Treasury when it comes to the yen. Yeah, I mean, he looks across the whole world, obviously, both as a public official and in his prior career as a hedge fund manager. But Japan has a special place in his heart, I think, it's fair to say. You know, we're trying to tally up how many times he's been there.

10:19I think it's at least 55. I've heard him say 60 in a recent interview. He talks a lot about the policies of former Prime Minister Shinzo Abe, Abenomics. He's very much enamored of that policy mix. And obviously, during his time at Soros Fund Management, they made a big bet on where the yen was going based on Abenomics. He's also obviously been involved or was involved in the Bank of England trade that's very famous. Legendary. That George Soros, yes, absolutely legendary trade that George Soros was involved in. He brings a certain what some folks have described as a quote unquote buy side mentality to the Treasury job, which is, you know, rather than coming from a big bank or someplace where you're working on mergers and acquisitions or IPOs or other types of deals that include many, many layers of management and people.

11:17And he is a specialist at identifying macroeconomic trends that can lead to big bets that pay off. One of the things that he learned from Soros, and he's talked about this a little bit, is the value of leverage. So if you see a really promising prospect out there and you're very confident in the outcome, there's no reason to hold back in terms of the amount of risk that you're willing to take if you believe that the outcome is more or less assured. I think that has contributed to an attitude that Bessett exhibits of making very bold moves from his seat at Treasury that are frankly unconventional for a Treasury Secretary to do, certainly for a Treasury Secretary to do basically on his own.

12:06He's not coordinating these types of moves with big multilateral groups of countries. He's not going necessarily to the IMF to talk these things through. He's not coordinating this well in advance. It's just, I see an opportunity here. I'm going to take it because I believe it's the right thing to do. And some people like that, and some people think that that's a pretty risky strategy. So how well is Treasury Secretary Besson's intervention working? And what does this move tell us about how likely we are to see more?

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15:16There are a lot of factors that could ease pressure on the yen. Lower U.S. tariffs, an end to the war with Iran, they could both bring down costs in Japan. There's also the big gap between Japan's 1 % benchmark interest rate and the rate in the U.S., 3.75%, something investors have long exploited to borrow money cheaply to invest in other places where rates are higher. What's known as the carry trade also puts pressure on the yen. I asked Bloomberg's Chris Antsi if, given all those factors, Treasury Secretary Scott Besson's intervention made a difference. Well, it certainly worked in changing the immediate dynamic.

15:54It surprised a lot of the market, but it has retreated since then. It points to the fact that at the end of the day, you can put a few big orders through and you can definitely move the market, definitely show the currency traders that you mean business, that you're coordinated. But if you don't have a shift in policies, it's very difficult to break the narrative. And the narrative has been one where the Bank of Japan is behind the curve. The prime minister, Sanai Takeuchi, has been talking about fiscal stimulus. This is in the context of Japan having the largest debt-to-GDP ratio in the world, well over 200 % of GDP.

16:43We think in the U.S. here that, you know, 100 percent is bad. Well, in Japan, it's double that. So and they're talking about fiscal easing, relaxing fiscal rules. And so it just kind of leaves international investors a little skittish. On Friday morning, U.S. jobs numbers came out. They were lower than expected. And then we saw the yen strengthen against the dollar because traders thought more, I guess, they thought more dollar-yen intervention could be coming. Just explain that link for us, if you could. What's going on here? Why we saw that move on Friday morning? So we saw that move because the unexpected decline in U.S.

17:21payrolls for July was a signal to U.S. investors that, you know what, maybe the U.S. economy isn't quite so hot as we thought. And maybe the pressure on the Federal Reserve to raise interest rates in coming months isn't as great as we anticipated. it. U.S. Treasury yields then came down. That means the gap with Japan isn't as wide as it was. And so you have the dollar decline. And it's declined across the board, not only against the yen, but others as well. And it even, you know, crept into my mind when we saw the yen shoot up against the dollar after those numbers. Did Japan intervene again? Because intervention can be quite effective when the market's already moving your way.

18:14You know, it's like, you know, you're pushing on something that's already moving in the direction you want. Dan, what do we know about Secretary Besson's endgame here? There was that moment kind of kicked all of this off where a photographer captured him writing on a pad of paper, this to-do list and by Japanese yen, five to$10 billion was on there. Do we have a sense of his commitment to this and sort of his appetite for further intervention? I think that there's a few different things going on here. I mean, the first thing I would say is that, you know, in case you were wondering, Secretary Besson is very much enjoying his job.

18:46He likes to sort of do things like the notepad with the to-do list of buying 5 to 10 billion yen. He likes to sort of be clever. But I think that some of the things that he works on are obviously very, very serious matters. And so there is always an element of forethought behind much of what he says. And so I think he does have an appetite to continue doing some of this type of intervention, but he does not have unlimited resources. And so there's only so much that he can do. So I think that's probably why you're seeing a little bit of the smokescreen about, well, what are we doing? When are we going to do it?

19:29Are we prepared to intervene again? Are we not? Because you don't want to sort of give markets too clear a signal about what you're going to do because you don't want to sort of tip your hand or lock yourself into a position that you can't then move out of. And his prior experience has served him well so far. Whether that can continue to be the case, I think, depends on how credible the market finds not only him, but also U.S. officials and U.S. policy more generally as time goes by. So I think of Scott Besson in his past life, if he were to make a bad trade or make a mistake, obviously not good for him.

20:10Stakes are a bit higher here, he being the Treasury Secretary. And I wonder sort of how you think about that, what the risks are for the U.S. and for the global economy if Scott Besson's moves, his intervention doesn't have the intended impact. Yeah, I think the stakes are enormous. A lot of these instruments do have safeguards built into them. But at the end of the day, you're sort of playing with the good faith and credit of the United States government. There is always the risk of an impact to yields, as we talked about, and interest rates, but also to losses of taxpayer money. So far, we have seen no indication that that has happened.

20:49But obviously, that is a risk here. And I think as somebody put it to me earlier this week, the Treasury Secretary is not supposed to act as a hedge fund manager. The Treasury Secretary is supposed to act as the chief financial steward of the United States economy. Besant has done this pretty much on a bilateral basis in a lot of these situations, which is something that previous secretaries have tried to avoid. And so, you know, all's well that goes well until things go off the rails. Things are going fine now, seem to be, but that's not to say that that is indefinite.

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