As we discussed yesterday, the Fed ended a series of ten consecutive rate hikes yesterday.

They took interest rates from zero to 5% over fourteen months.

And yet the 10-year yield remains in the 3s.

This describes the dreaded “inverted yield curve” that most have pointed to as the reason to expect looming recession.

But it’s important to remember, we are in a world of explicit market manipulation.  The world’s central banks crossed the line in the sand at the depths of the Global Financial Crisis, and unsurprisingly, haven’t turned back.  Their finger prints are all over markets, when it matters.

They’ve outright manipulated bond markets along the way, with no apologies.

With that, given the clear evidence of trouble that arises when the benchmark U.S. 10-year yield has crossed the 4% threshold, in this recent tightening cycle, it’s reasonable to think that the major central banks in the world might want to coordinate to keep a lid on the 10-year yield.

Who would be the logical buyer of Treasuries (therefore applying downward pressure on yields)? 

For that answer, let’s revisit an excerpt from my April 28th note oflast year, just after the Fed started its rate hiking campaign.

How do you prevent a global economic shock that may (likely) come from reversing the mass liquidity deluge of the past two years (if not 14 years, post Global Financial Crisis)?

You keep the liquidity pumping from a part of the world that has a long-term structural deflation problem, and that has the biggest government debt load in the world (exception, only Venezuela).

The Bank of Japan, in this position, can be buyers of foreign government debt (namely the U.S.) to keep our market rates in check (keeps the world relatively stable), which gives the Fed breathing room on the rate hiking path.

And Japan’s benefit?  The world gives Japan the greenlight to devalue the yen, inflate away debt and increase export competitiveness (through a weaker currency).  They hit the reset button on an unsustainable, debt-laden economy.”

With the above in mind, which country has bucked the trend of the global rate hiking cycle?  Japan.   Despite experiencing four decade high inflation, they have continued to print yen, and buy assets (domestic and global).

And you can see the devaluation in the yen since the Fed started hiking last year.

And you can see the devaluation in the yen since the Fed started hiking last year.