Foreign institutions, particularly sovereign reserve managers, buy US debt not necessarily because of its yield but because no other market is large or liquid enough to absorb trillions in capital. This creates a captive market and keeps US borrowing costs artificially low.

The little-known FEMA repo facility allows foreign central banks to post US Treasuries as collateral to get dollars. This lets countries like Japan intervene in FX markets without fire-selling their bond holdings, thus mitigating stress on the US Treasury market.

The US Treasury's intervention was not just about the Yen's exchange rate or trade balance. A primary motive was to prevent Japan from being forced to sell its vast US Treasury reserves to fund its own intervention, which could create significant pressure on the US bond market.

When the US and Japan intervene to buy yen, savvy investors see it as a desperate measure masking fundamental problems. This perception of rising risk without rising returns drives investment away, creating a feedback loop that can further weaken the currency.

The Bank of Japan's intervention was not just about the yen, but a strategic move to "punt for risk parity"—to reduce volatility and calm markets. By strengthening the yen, they stabilized US Treasury rates, which in turn supported equities, revealing a tug-of-war between central banks seeking stability and traders seeking volatility.

The US is signaling a major shift from its long-standing 'King Dollar' policy. By being willing to devalue the dollar, it can strategically intervene in currency markets to bolster allies like Japan while simultaneously hurting economic adversaries like China by making US manufacturing more competitive.

The US coordinated with Japan on currency intervention not just to support the yen, but as a strategic move to manage US long-term interest rates. The Treasury believes excessive dollar-yen volatility spills over into Japanese Government Bond (JGB) yields, which in turn significantly influences the long end of the US Treasury curve, making yen stability a tool for domestic rate management.

In a highly unusual move, the US sold its euro reserves—not US dollars—to intervene in the yen market. This was a tactical decision to frame the action as a specific judgment on yen over-depreciation, rather than a broader statement on the strength of the dollar.

Because Japan is the largest foreign holder of US debt, instability in its domestic bond market has a direct impact on American consumers. If Japanese bond yields rise, Japanese investors will sell their US treasuries, causing US interest rates to spike and increasing borrowing costs for mortgages and auto loans.