Be patient supports Japan's use of a Fed repurchase mechanism to support the yen and prevent large-scale sales of U.S. Treasuries.

U.S. Treasury Secretary Janet Yellen supports Japan's use of a Federal Reserve financing tool to boost the yen, a move that helps avoid excessive selling pressure on the U.S. bond market. The Foreign and International Monetary Authorities Repo Facility allows foreign central banks to obtain dollar liquidity by using U.S. Treasury securities they hold as collateral, without having to sell U.S. bonds in the open market to raise funds. This mechanism was introduced during the pandemic in 2020 and aims to provide liquidity to counterparties while minimizing disruptions in the U.S. bond market. Japanese Finance Minister Shunichi Suzuki stated that Japan bought yen last Friday and will use this mechanism in the future. Yellen expressed support for this initiative in a post and indicated she would encourage the expansion of this mechanism. According to the latest data from the U.S. Treasury, Japan holds over $1.1 trillion in U.S. Treasury securities, making it the largest foreign holder of U.S. debt. Given the concerns regarding the Federal Reserve's ability to combat inflation and the fiscal outlook in the U.S., Washington remains vigilant about Japan potentially raising funds by selling bonds to intervene in the currency market. Philip McNicholas, sovereign debt strategist at Robeco Singapore, noted that using this mechanism is preferable for the U.S. given the current bond market environment. He stated that the Japanese Ministry of Finance can build net short positions without directly selling U.S. bonds while boosting demand for yen, thereby limiting the impact on the U.S. Treasury market. The 30-year U.S. Treasury yield closed at its highest point in 19 years in July, while the 10-year benchmark Treasury yield reached its highest level since early last year. On Monday, optimism from U.S.-Iran peace negotiations led to a drop in oil prices and a decline in U.S. bond yields across the board. According to documents on the Fed's website, the repo facility has a $60 billion daily usage limit per counterparty, though the Federal Reserve's subcommittee can adjust this limit. If Japan and the U.S. want to minimize the impact on the Treasury market while supporting the yen, then this mechanism is the obvious choice, said Homin Lee, senior macro strategist at Lombard Odier in Singapore. Whether Japan uses this tool is one thing, but if Japan wants to sustain currency market intervention for a while, the logic of using this mechanism is very clear.