Emerging market (EM) currencies are experiencing gains as a "Bessent Put" in Treasuries has burnished the appeal of carry trade strategies. This intervention by the US Treasury, involving an unscheduled increase of $2 billion in liquidity buy-back operations, particularly for longer-dated debt, was warmly received by investors. The market is interpreting this as the Treasury's displeasure with the recent sell-off at the long end of the bond market, akin to a "Greenspan Put" that historically protected equity markets.
This more activist stance by the US Treasury, announced by Secretary Bessent, has led to a 10 basis point drop in longer-dated US yields, lifting equities and softening the dollar, especially against high-beta currencies like the Norwegian Krone, New Zealand Dollar, and Swedish Krona. The "Bessent Put" is seen as reducing a key threat to risk assets, ensuring carry trade strategies remain popular. The minutes of the July FOMC meeting also contributed to a "Risk-on, Dollar-off" environment, with short-dated US yields falling 5 basis points, further supporting EM FX.
The US dollar index (DXY) unexpectedly broke down from its 99.40-100.00 range and could drift lower to 98.65 or even 98.00 if risk assets continue to rally on the Treasury's intervention. In Europe, the euro strengthened, with EUR/USD breaking higher and approaching ING's end-September target of 1.17. Foreign investors have shown significant interest in eurozone securities, purchasing around €1.1 trillion over the last 12 months, with a record €200 billion in June. However, some market participants, including analysts at JPMorgan Chase & Co., Jefferies LLC, and PGIM Inc., are warning that such unpredictable debt management moves by the US Treasury could lead to higher borrowing costs by increasing the term premium on US government debt.
Emerging Asian stocks and currencies also saw rises, with the MSCI emerging Asia equities index jumping 2.3%, its best day since August 5. The emerging market currency index rose as much as 0.4% to a record high. South Korean stocks led gains, with the Kospi jumping 5.9%, Samsung Electronics rising 8.5%, and SK Hynix 11.9%. Indonesian shares gained 1.5%, while the Malaysian ringgit strengthened 0.3% to 4.04 per US dollar. The Korean won has particularly outperformed, supported by a resilient semiconductor and AI investment cycle. However, some caution that this rebound might be a relief rally rather than a sustained recovery, as underlying structural pressures like rising global debt issuance and elevated oil prices remain.
