Recent US Treasury Interventions in Bond and FX Markets | Steven J. Davis, Anil Kashyap | Hoover Institution

Steven J. Davis (0:09)

With me now is my good friend and long time Chicago booth colleague, Anil Kashyap. Anil, thanks for joining.

Anil Kashyap (0:17)

Thanks for having me, Steve.

Steven J. Davis (0:19)

You are an expert in monetary policy, financial markets, and the Japanese economy. So you're just the man to ask some questions and get your take on some recent interventions by the US Treasury, Scott Bessett, Secretary in foreign exchange markets, in the long-term bond market. So I want to get your take. And so again, just you can fill out the details if you want, but there's been unusual interventions by the US Treasury both in foreign exchange markets to help prop up the exchange value of the Japanese yen.

And then, just last week, I guess, a little more than a week ago, the Treasury made some notable interventions, at least visible interventions in the US Treasury bond market. So unpack that for us and give us your take on these events and what they mean.

Anil Kashyap (1:15)

Well, the connective tissue is that the Secretary of the Treasury is quite worried about the borrowing costs for the United States. So the decision to try to prop up the yen and spend US dollars on that was partly because he didn't want the Japanese potentially having to sell Treasuries to finance the purchases that they said they were going to do. He decided to do that in a break with usual protocol because the Japanese could have gone to markets if he'd asked them to. They could have used a repurchase strategy to fund the things. They didn't necessarily have to sell the Treasuries.

Steven J. Davis (2:00)

So just to understand the details, he sold US Treasuries in order to get resources to buy Japanese.

Anil Kashyap (2:07)

So he was willing to buy Yen to prevent the Japanese from having to spend dollars to buy the Yen.

Steven J. Davis (2:16)

I presume buying Yen means buying short-term Japanese securities. What does Akizi buy?

Anil Kashyap (2:23)

Yeah.

He was intervening in currency markets to buy Yen. And he was spending dollars. In some cases, I guess even spending money that had been parked at the European Central Bank.

And so this was pretty unusual for one country to support another like this. We hadn't done it, I believe, since the Plaza deal in 1986 But the motivation was pitched as we want to not put pressure on the funding costs of the US Treasury. And that links it to the second decision to say we're potentially going to be buying back Treasury bonds that were outstanding. This is pretty unusual because the Treasury usually says, and has for a long time had this policy of, we want everybody to know how much debt we're going to sell. We want to tell you exactly what we're going to be selling. We're going to tell you, you know, 13 weeks ahead of time, here's how much we're going to do. The last time this had happened, where there had been even a departure from the usual schedule was something that the Biden administration did. And they were following the guidance of their private sector advisory committees, which is this obscure group called the Treasury Borrowing Advisory Committee, which is considered prestigious to be on if you're a market participant, because it means the Treasury is listening to you about how much debt of certain maturities they should issue. You might remember that in the first Trump administration, Secretary Mnuchin was obsessed with issuing a 100-year bond because he thought that interest rates were so low, why not turn it out to 100? And the TBAC, the Borrowing Advisory Committee said, you know what, this isn't going to work the way you think. If you issue a few 100-year bonds, it's going to be expensive to trade them. People aren't going to be interested in bothering to set up the architecture to price them and all of that. So if you're going to do it, you're going to have to keep doing it over and over and over again. So the mantra of the Treasury is regular, predictable auctions.

Steven J. Davis (4:42)

I just want to make sure I understand. The unusual part about, the unusual aspect of Besson's announcement about purchasing long maturity, US Treasury securities, is not that it happened, but it happened off the pre-announced, regular schedule.

Anil Kashyap (4:57)

Well, or they were departed because instead of saying, here's the amount that's going to be out there for everybody to have, we're going to just take some out of the market. So the way they arrive at this is they figure out what their funding needs are. That's determined by the deficits and seasonal factors and all the rest of it. And then they say, we're going to stick to it so that if you're planning to try to manage your portfolio of treasuries, you know what the supply is going to be. You can decide how you organize it. For them to step in and take some out is kind of unusual because it disrupts those plans. And so he did that.