US Treasury Secretary Scott Bessent has warned that volatility in the Japanese yen risks spilling over into global markets, adding a fresh layer of uncertainty to an already fragile international financial landscape. His comments come as currency markets remain under pressure from diverging central bank policies and shifting investor expectations.
Bessent, who has styled himself as America's top bond salesman, made the remarks amid growing concerns about the interplay between currency swings and the massive volume of debt issuance currently absorbing global capital. The warning highlights how movements in one of the world's most traded currencies can quickly transmit shocks across borders, affecting trade competitiveness, corporate balance sheets, and the pricing of risk assets.
The yen has been a focal point for traders for much of the past year, with the Bank of Japan gradually moving away from its ultra-loose monetary policy while the Federal Reserve and other major central banks have been navigating their own tightening cycles. This divergence has created persistent pressure on the yen, and Bessent's comments suggest that Washington is monitoring the situation closely for signs that it could destabilise broader financial conditions.
His warning arrives at a time when global markets are already grappling with an unprecedented wave of corporate debt issuance, particularly from technology giants funding artificial intelligence infrastructure. US investment-grade corporate bond issuance has totalled roughly $1.7 trillion so far this year, about 27% above last year's pace and on track to exceed $2 trillion for the first time. Bessent has previously noted that much of this issuance is almost yield-agnostic, with companies confident enough in AI returns that they are willing to borrow at almost any cost.
This flood of corporate debt has created what some analysts describe as a reverse crowding-out effect, where capital flowing into corporate bonds is capital not flowing into Treasuries, forcing Treasury yields higher to clear the market. Wall Street veteran Ed Yardeni has argued that the AI revolution is producing a classic crowding-out effect, causing Treasury yields to rise even as corporate borrowing costs relative to risk-free bonds remain compressed.
The combination of currency volatility and heavy debt issuance is a delicate one for policymakers. Higher Treasury yields could fuel a feedback loop where rising debt-servicing costs expand deficits further, adding to the pile of US debt and pushing yields up further. The federal budget deficit is on track to reach $2 trillion this fiscal year, with debt servicing costs alone running at $1 trillion annually.
Federal Reserve Chairman Kevin Warsh has also acknowledged the trend, noting at the Jackson Hole conference that ever-expanding pools of capital are pouring into AI-related infrastructure. Private credit is financing much of this boom, and chipmaker Nvidia is even leveraging its balance sheet to back AI deals. So-called hidden borrowing has exploded, with one tally putting it at $1.65 trillion.
Markets are showing some signs of fatigue, however. S&P Global warned last month that hyperscalers are paying a higher premium compared with yields on risk-free bonds, and that market participants are growing leery of quickly rising leverage from issuers previously characterised by strong and reliable cash flow. Bessent's yen warning adds another dimension to these concerns, underscoring how interconnected currency markets, sovereign debt, and corporate financing have become in the current environment.