US and Japan flirt with joint currency intervention

0:01Good morning from the Financial Times. Today is Tuesday, January 27th, and this is your FT News briefing. The U.S. has controversial conditions for Ukrainian security guarantees, and the yen took a leap yesterday. Plus, big tech is going on a massive borrowing spree. I'm Sonia Hudson, and here's the news you need to start your day.

0:33The U.S. is linking security guarantees for Ukraine to giving up territory to Russia. The Trump administration has indicated to Kiev that it would need to agree to a peace deal that involves ceding the eastern Donbass region. That's according to eight people familiar with the talks. The White House said, quote, this is totally false. Ukrainian President Volodymyr Zelensky's office did not reply to a request for comment. Ukrainian and European officials described the U.S. stance as an attempt to strong-arm Kiev into making painful territorial concessions. Giving up the Donbass has been a red line for Zelensky and for a majority of Ukrainians, according to polling earlier this month.

1:24The dollar sank to a four-month low yesterday, but the Japanese yen kept climbing and climbing. It leaped up 1 % to the dollar. There's speculation that the U.S. and Japan could be working together to support the yen. I'm joined now by the FT's senior markets correspondent, Ian Smith, to tell us more. Hi, Ian. Hi, Sonia. So what signs do we have that there could be a joint currency intervention? So as you've said, we've seen a dramatic appreciation in the Japanese yen against the US dollar on Monday following a big jump. On Friday, as speculation swirls that the US and Japanese authorities are working together to strengthen the yen, which had fallen to an 18-month low against the dollar earlier this month.

2:10And on Friday, traders reported that the US authorities had done what is called a rate check on banks, where they asked them about where they are positioned on dollar-yen. And this traditionally very kind of old school way of preparing the ground for a currency intervention. So given that, market participants are questioning, will this be perhaps a joint intervention with the US? So why does Japan want to prop up the yen? So yeah, the yen has been weakening for some time now before this latest rally. And that's partly because some people think that the Bank of Japan, which is increasing interest rates, won't be able to move as quickly as the market had hoped.

2:49But also because Japan's new prime minister has promised a big stimulus package and has now announced a snap election. So people are kind of expecting more fiscal stimulus in Japan, which is boosting stocks, but weakening the currency and adding to some concerns in the market about the sustainability of Japan's vast government debt. Okay, so obviously it makes sense for Japan to want to prop up its currency here when it's worried about it weakening. But why would the US want to get involved with this, especially since strengthening the yen is weakening the dollar? In part, that would be to protect its exporters against a sudden appreciation of the US dollar against the yen.

3:31Which would make it more expensive for Japanese importers to buy American products. Exactly. And then you also have this point that the US does not want to see a disorderly sell-off in the Japanese bond market. So what's been happening is that Japanese bonds have weakened with the currency, and that has bred volatility also in the US government bond market. So you've got this situation where there's an aligned interest from US and Japanese authorities not to see a deepening sell-off in the Japanese government bond market and currency that could create volatility in the US. What kind of knock-on effects could we see or are we seeing outside the US and Japan?

4:12Yeah, so this is not happening in a vacuum. The US dollar had its worst week since May last week as the Greenland crisis reawakened some of those investor concerns around erratic US policymaking. So this has really piled some more pain on that. And it's sending some investors looking for other haven currencies. So we've seen the Swiss franc do very well and we've seen the euro strengthen. Do you think we could see more intervention in foreign currency markets going forward? It's definitely a possibility. It's really interesting to see the Swiss franc, which has now reached its strongest levels against the dollar since 2015.

4:52And the Swiss franc is appreciated strongly. And at some point, that poses challenges to Switzerland through deflationary effects and through the challenges it poses to the Swiss economy. So Switzerland did agree with the US in September that it would not manipulate its exchange rate. But the statement also recognised that market interventions can be a valid tool for addressing big periods of volatility in currencies or disorderly moves in exchange rates. So it would perhaps come down to whether any intervention was deemed justified from a kind of broader fall in the dollar and appreciation in the Swiss franc that kind of moves ahead of economic fundamentals.

5:31All right. Well, sounds like the yen, the dollar and the Swiss franc are spaces to watch. Ian Smith, the FT's senior markets correspondent. Thanks so much. Thanks a lot.

5:47Friends and friends, friends and friends, we sat at the house with Rani Gavili, Gabor Israel. That's Israel's Prime Minister, Benjamin Netanyahu. There are no more prisoners in Gaza. Yesterday, he announced that the country retrieved the remains of the last Israeli hostage in Gaza. They are of Rani Gavili, a police officer who Hamas killed during the attacks on October 7, 2023. More than 250 hostages were taken and 1 ,200 people were killed that day. It triggered two years of devastating fighting in Gaza. The U.S. brokered a ceasefire deal in October. It's mostly held. The Trump administration announced last week the start of the so-called Phase 2 of the deal and a new governing structure for the shattered enclave.

6:51Big tech is on track to dominate the U.S. bond market. By 2030, half of the 10 largest borrowers in the U.S. investment-grade corporate bond market will be so-called hyperscalers. That's your alphabets, your Amazons, your Meta, companies that are building enormous AI data centers. This is all according to Apollo Global Management. And the shift could expose some of the world's safest securities to greater risk. I'm joined now by the FT's Michelle Chan. She covers U.S. credit. Hey, Michelle. Hi. Thanks for having me. Thanks for being on the show. So as I understand it, there's two things happening here.

7:32One is tech giants are piling into the bond market. And two, banks are pulling back. Why is that? Sure, you're absolutely right. So tech giants are leaning into the U.S. investment-grade bond market because it's really the cheapest way for them to fund this massive AI infrastructure. The U.S. investment-grade bond market is very liquid, very big. It's worth$10 trillion. So doing that would be a lot cheaper than borrowing from private credit, for example. and the banks, which are the longtime borrowers in the market, they are retreating because they now expect this kind of regulatory relief that would allow them to hold less capital on their balance sheets in the long run.

8:21And people in the market are expecting that that will reduce their borrowing need over the next few years. How dramatic is this shift? Like, how quickly have we seen the makeup of the corporate bond market change? So from the Morgan Stanley forecast, we are expecting about$400 billion in AI and hyperscalar-related issuance this year, which is up from just$44 billion in 2024. So we are talking about almost like a, you know, tenfold increase in just two years. Wow, that's incredible. What impact has this already had on the bond market? One of the most notable examples are the borrowing costs of the more indebted companies, including Oracle.

9:12So since Oracle borrowed$18 billion from the bond market last September, in just a matter of three and a half months, their borrowing cost is already 0.75 percentage points higher than it was. It's very important to note that these companies are huge. and even one percentage point of an increased borrowing cost could cost them billions of dollars in the long run. So it's very important for these companies to keep their credit rating, and it would cost a lot for both the company and existing bondholders if their future borrowing cost is increased. What are some of the long-term consequences of this shift?

9:59This is a very good question. Some investors are worried that this would mean that they have more concentrated AI risk in their portfolios because a lot of the tech companies are already a heavy player in the equity market. And if we are also very exposed to tech names in the bond market, it would mean that across portfolios, we have a very concentrated AI risk. And there is also concern that this kind of AI infrastructure would not be profitable until years later or not at all. So there are concerns about investors that there are overcapacity problems in the industry as a whole, and that would weigh down on the entire investment grade universe.

10:46Michelle Chan is the FT's U.S. credit correspondent. Thanks, Michelle. Thank you.

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