The stock market bull case just got stronger

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Last week may prove to be a key turning point for financial markets, reversing what many feared was the beginning of a broader correction.

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For months, investors have been contending with two powerful forces: a relentlessly strong U.S. dollar and steadily rising real interest rates. Both have drained liquidity from the financial system, pressured asset valuations, and created challenges for everything from growth stocks to precious metals. Add in the volatility in oil prices and persistently higher crack spreads (the price difference between a barrel of crude oil and the products refined from it) following the closure of the Strait of Hormuz, and the pressure was amplified even further. This is important because as most commodities are priced in U.S. dollars, a stronger greenback and higher energy prices together act like a global tightening mechanism.

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The first positive shift came when new Federal Reserve chair Kevin Warsh chose to hold rates steady at a time when many investors were bracing for another hike. That mattered because markets were already adjusting to a much higher cost of capital thanks to bond yields getting pushed to levels not seen since 2008. The more consequential development came days later when Treasury Secretary Scott Bessent joined Japan in supporting the yen after the currency had weakened sharply against the U.S. dollar.

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Japan is one of the largest foreign holders of U.S. government debt, with Treasury holdings estimated around US$1.1 trillion to US$1.4 trillion, depending on the reporting measure. Traditionally, when Japan wants to support the yen, it sells dollar assets, including U.S. Treasuries, and uses the proceeds to buy yen. The concern is that when the yen weakens, Japan intervenes, Treasuries are sold, Treasury supply rises and U.S. yields move even higher. That is exactly why the market pays such close attention to Japanese intervention.

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This is where last week’s intervention became so important. The U.S. Treasury participated in a co-ordinated yen-buying operation alongside Japan, with the Financial Times reporting that the New York Fed sold euros for yen on behalf of the Treasury in order to pay for it.

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The even bigger development was the discussion around the Federal Reserve’s Foreign and International Monetary Authorities repo facility. This facility allows foreign central banks to pledge U.S. Treasuries as collateral and borrow dollars without selling those Treasuries outright. Japan can then use those dollars to intervene in currency markets while avoiding forced liquidation of its Treasury portfolio. To simplify, this takes the old model of: Japan needs dollars, Japan sells Treasuries and the Treasury market absorbs the supply — and transforms it into: Japan pledges Treasuries, borrows dollars and avoids dumping bonds into the market. From Washington’s perspective, that is highly attractive because it reduces the risk of forced Treasury selling and upward pressure on U.S. borrowing costs.

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Some, such as the Wall Street Journal’s James Mackintosh have described this as “money printing,” but that is too simplistic. It is true that a repo transaction temporarily expands the Fed’s balance sheet. But this is not quantitative easing in the traditional sense. The Fed is not buying Treasuries outright, monetizing government debt or permanently injecting reserves into the system. It is making a collateralized loan against existing Treasury holdings. When the loan is repaid, the dollars disappear and the collateral is returned.