Japanese bond yields break records, Bezent puts pressure on yen, and BTC arbitrage deals face liquidation risks

According to Woofun AI, Japan's interest rate shock intensified further on Tuesday, and the core conflict at the macro level has moved from simple monetary policy expectations to a game of geopolitics and fiscal discipline. US Treasury Secretary Scott Bessent directly met with Japan's Finance Minister Katayama May and Bank of Japan Governor Kazuo Ueda at the Group of Twenty (G20) finance ministers meeting in Asheville, North Carolina, and publicly urged Japan to speed up the pace of interest rate hikes and develop a more clear fiscal plan. Bezent claims to have unknown market intelligence and is convinced that the Japanese authorities will take action to strengthen the yen.

This public pressure from Washington, combined with the bond market unexpectedly falling below the key support level, caused expectations of interest rate hikes in September, which had been partially digested by the market, to drastically disrupt the global liquidity structure.

The complete collapse in bond market data has triggered a ripple effect in the global market. The 30-year Japanese Treasury yield is approaching an all-time high of 4.205%. The level was last tested in May; the 10-year yield hit 3% for the first time since 1996. More importantly, the two-year yield hit a 31-year high, which means that the cost of yen arbitrage, which has been close to zero for almost a generation, has been rising rapidly. The Japanese budget assumes a long-term interest rate of 3% when calculating debt repayment costs, and the current rise in borrowing costs is severely testing this fiscal assumption.

This fluctuation quickly spread to other major economies: the UK 10-year Treasury yield rose to 5.23%, for the first time since 2008; the US 10-year yield was 4.78%; and the price of Brent crude oil topped $92 per barrel.

According to data compiled by Woofun AI, this cross-asset class linkage shows that Japan's steeper yield curve is reshaping the global risk-free interest rate benchmark, thereby reducing the valuation space for high-risk assets.

There are significant differences in interpretations of market sell-offs, and the potential risks of arbitrage trading are huge. Kiuchi Nobuhide, a former member of the Bank of Japan and currently working at the Nomura Research Institute, believes that the 3% yield is not simply a monetary policy issue, but rather a market ruling on Prime Minister Takaichi Sanae's expansionary fiscal policy, which may force Takaichi to revise some policies.

Meanwhile, data from the Bank for International Settlements (BIS) revealed a huge amount of offshore leverage: in March 2024, yen loans to non-bank institutions outside of Japan were close to $250 billion, and offshore centers had cross-border yen claims of about $500 billion. The BIS cautioned that the actual size is difficult to accurately estimate, but compared with the Japanese yen arbitrage transaction of about $250 billion in August 2024, it is currently estimated to be as high as $500 billion. The lessons of history are still clear: a 6% rise in the yen in August 2024 triggered a global financial shock. At that time, Bitcoin and Ethereum fell 20% in a wave of liquidation, as additional margin forced traders to liquidate various asset positions. The current rise in financing costs has made these leveraged bets face higher deleveraging pressure.

The current state of exchange rates and future key points have become the focus of market attention. USD/JPY traded at 159.75 on Monday, close to the 160 mark. This level may increase the possibility of Japan's intervention in foreign exchange purchases. Since the joint operation with Washington on July 31, Japan's yen defense line has had no bottom line. Although the official red line is 160, the trigger for Bitcoin is speed rather than level. Bank for International Settlements research indicates that the rate of appreciation of the yen in 2024 — that is, the most drastic change in the exchange rate in a single day — is the key to breaking arbitrage transactions. The Bank of Japan will announce the interest rate decision on September 18, and the market price will increase interest rates by 25 basis points to 1.25%. Kazuo Ueda's guidance on the future path may have a greater impact on the crypto market than the interest rate hike itself. Any hint of a rapid tightening of monetary policy could instantly ignite huge arbitrage positions lurking in the offshore market.