After steadily declining following Trump's election, U.S. long-term Treasury bonds have shown signs of recovery after the nomination of new Treasury Secretary Ben Snet. Why such a significant reaction in the financial markets? With the narrowing of the U.S.-Japan interest rate differential, could the yen also follow suit and rebound?

To conclude, the market anticipates that Snet will demonstrate leadership in reducing the fiscal deficit and easing external tariff pressures, which is expected to alleviate rising inflation expectations, thereby returning demand for long-term Treasury bonds. If the Federal Reserve continues to lower interest rates, the depreciation of the yen may also be temporarily halted.

As many investors were disheartened by the continued decline of U.S. long-term Treasury bonds, Trump's nomination of Snet offered them a glimmer of hope. The recent decrease in U.S. long-term bonds was mainly driven by rising inflation expectations and the prospect of a significant increase in the fiscal deficit. If Snet can manage to temper Trump’s impulsive tendencies and further reduce tariffs, it could suppress the trend of imported inflation, naturally providing continued momentum for the recovery of long-term Treasury bonds.

From Chart 1, it can be seen that the 5-year inflation expectations spiked to 2.46% after Trump's election but dropped to 2.32% after Snet's nomination. Although this is still above the target of 2%, it did not breach 2.5%, thus providing a respite for long-term Treasury bonds.

However, this is just an initial interpretation by the market. Beyond this honeymoon period, Snet will have to face the challenge of successfully passing measures through Congress and whether collaboration with Trump will actually go smoothly. For Trump, loyalty may be valued more than actual ability, and any policy setbacks could easily make Snet a scapegoat. Thus, while bond investors may remain optimistic, they still need to exercise caution.

Moreover, the recent core CPI in Tokyo reported an unexpected year-on-year increase to 2.2%, compared to 1.8% last month, which has led to renewed expectations that the Bank of Japan may further raise interest rates in December, pushing the yield on Japan's 10-year bonds back up to around 1.09%. This, compared to a decline in U.S. 10-year bond yields, has further narrowed the interest rate differential between the U.S. and Japan.

Looking at yen futures from the CME, Chart 2 shows a recent high of 0.006686 in the past month, indicating clear short-term upward momentum. Investors should note that such trends typically do not continue indefinitely, especially since there is currently no stock market crash pressure leading to rapid deleveraging. This means the yen is likely to appreciate for a while, take a breather, and then attempt to rise again. Investors should avoid chasing high prices to mitigate potential losses when corrections occur.

Therefore, if the Bank of Japan indeed begins to raise interest rates in December, combined with ongoing interest rate cuts in the U.S. due to easing inflation pressures, the yen is less likely to depreciate further in the short term, moving toward a gradual shift from weakness to strength as it consolidates and alleviates selling pressure. Investors should wait for new direction in light of upcoming U.S. employment data or Japan's interest rate decisions.