On June 27th, Cailian News reported that the foreign exchange market, which has often been affected by bond spreads, was somewhat "inverted" overnight and became a key reason for the decline in US bonds...

Market data shows that overnight, yields on various US bonds rose across the board, as the market feared that the Japanese authorities might sell US Treasury bonds to provide funds for foreign exchange intervention. In addition, the scarcity of liquidity at the end of the month and the rebound in inflation data from non-US economies such as Canada and Australia also put pressure on US bonds.

At the end of the New York session, the 10-year US Treasury bond yield, known as the "anchor for global asset pricing," rose 7.6 basis points to 4.321%, hitting a high of more than a week. Yields on other maturities also rose across the board, with the 2-year, 5-year, and 30-year US Treasury bond yields rising 1.3 basis points to 4.758%, 7 basis points to 4.345%, and 7.5 basis points to 4.451%, respectively.

The further plunge of the yen on Wednesday has made many US bond traders feel quite uneasy because if the Japanese authorities intervene in the foreign exchange market to support the yen, the largest overseas "creditor" of the United States is likely to sell US Treasury bonds again, as it has done in the past.

The USD/JPY rose as high as 160.82 in overnight trade, the highest level since December 1986. So far this year, the USD/JPY has risen by about 14%. On Wednesday, Masato Kanda, Vice Minister of Finance of Japan and Chief Foreign Exchange Officer, said the government is closely monitoring the yen exchange rate with a high sense of urgency and will take appropriate action when necessary. He said the recent trend of the yen was "fast" and "one-sided," but did not say whether it was excessive. After his speech, the yen extended its decline.

According to industry statistics, the Japanese authorities may have spent a record-breaking JPY 9.8 trillion (approximately USD 620 billion) to support the yen in two foreign exchange intervention operations at the end of April and early May. This figure has already exceeded the total amount spent on intervention in 2022.

Behind this, according to data from the United States and Japan, the Japanese authorities may have sold some US Treasury bonds in the second quarter to provide funds for intervention.

The US Treasury Department's report on international capital flows in April 2024 showed that Japan reduced its holdings of US Treasury bonds by USD 37.5 billion to USD 1.1503 trillion. On April 29th, the USD/JPY exchange rate fell to a 34-year low of 160.24.

"For domestic and intervention-related reasons, Japan may be more willing to sell US Treasury bonds in the future," said Tony Farren, Head of Rates Sales and Trading at Mischler Financial Group.

In addition to the sharp drop in the yen, the overnight US bond market also faced some other bearish pressures. As the end of the month and quarter approached, the liquidity of the currency market may face challenges due to traders closing their books, putting pressure on US bonds.

"Given the uncertainty of the domestic and international political backdrop, the rise of inflation in unexpected places like Canada and Australia does not help stabilize the market, and the approach of the end of the month is also suppressing people's risk tolerance," said George Catrambone, Head of Americas Fixed Income at DWS.

Data released on Wednesday showed that Australia's consumer price index rose by 4% year-on-year in May, higher than economists' expectations. The yield on Australia's two-year government bond soared 18 basis points that day to its highest level since November, as traders increased their bets on the Reserve Bank of Australia's resumption of interest rate hikes at its next meeting.

The Canadian bond market also suffered a similar sell-off on Tuesday due to inflation data. All of this has made investors wary ahead of Friday's release of the US May PCE price index.

"People are beginning to realize that there is still a long way to go before inflation is conquered," said Farren.

Of course, for bond market bulls, there was good news this week: Steady demand for two- and five-year US Treasury bonds slowed or prevented the decline in the bond market to a large extent.

The US Treasury issued USD 70 billion in five-year government bonds on Wednesday, with a bid-to-cover ratio of 2.35 times. The winning bid yield was 4.331%, lower than the pre-issue trading level of 4.335% at the deadline of 1 p.m. EST. The mid-term US bonds subsequently rebounded, narrowing their decline. The direct bidder received 17.7% of the allocation, while the indirect bidder's percentage rose to 68.9%, and the primary dealer's percentage was 13.4%, lower than the previous percentage.

On Tuesday, a two-year government bond auction worth USD 69 billion also saw good demand. This week's series of US bond auctions will end on Thursday with a USD 44 billion auction of seven-year government bonds.