The side effects of Bessemer's "quasi-QE" are becoming increasingly evident! Hedge funds are accelerating their bets on a weaker dollar to guard against a larger-scale bond purchasing program.

After U.S. Treasury Secretary Scott Bessent announced a plan to at least double the scale of long-term Treasury repurchases to $4 billion, the U.S. dollar index promptly fell to its lowest level since mid-May. Hedge funds are increasing their short positions on the dollar at the fastest pace this year, awaiting further details from Bessent on his fiscal plans to assess the long-term impact of this quasi-quantitative easing policy on the forex market. In the past week, both the spot market and the options market have sent strong bearish signals. Torsten Schoeneborn, co-head of G10 FX trading at Barclays in London, pointed out, We have especially seen hedge fund clients reacting significantly in the linear trading space, with dollar sell-offs accelerating amid persistent dollar supply throughout August. Meanwhile, a gauge measuring bearish option premiums has climbed to its highest level since February. The dollar index has dropped to a three-month low and is becoming the biggest sacrifice in Bessents intervention in the bond market. Bessent's quasi-QE gamble: The 5% yield Maginot Line On August 19, the day after the 30-year Treasury yield hit 5.33%, a new high since 2007, Bessent announced a shocking decision that rattled Wall Street: to at least double the upper limit of liquidity support repurchase operations for 10- to 30-year long-term Treasuries from $2 billion to $4 billion. Michael Hartnett, Chief Investment Strategist at Bank of America Securities, characterized this move as quasi-quantitative easing (quasi-QE) and included it in a series of Bessent's bearish options. According to his analysis, this combination includes: signing dollar swap agreements with Asian and Gulf countries, implementing currency intervention in the yen, and the quasi-QE enacted through the doubling of long-term Treasury repurchases with the tacit approval of the Federal Reserve. Hartnett made it clear that Bessent's goal is to defend the 5% yield threshold on 30-year Treasuries. If he cannot bring yields back below 5%, the dollar will face a substantial decline, and investors will then ramp up short positions on highly leveraged assets like large AI cloud computing firms, private credit, and cyclical assets such as financial sectors. However, this market-saving medicine had only a one-day efficacy on the 20th, long-term bond yields rebounded across the board, with the 30-year Treasury yield returning to the high range of 5.25%-5.26%. Hartnett remains cautious, stating that the panic-driven fix measures should be sufficient to stabilize but cannot lower the yield on Treasuries. Hedge funds vote with their feet: Resonance of spot sell-off and options betting Bessent's intervention is triggering a chain reaction in the foreign exchange market. Barclays pointed out that hedge fund clients have continued to sell dollars throughout August, and this trend has significantly accelerated following the announcement of the repurchase plan. This selling behavior has distinctly directional characteristics it is not merely a position adjustment, but a systematic bet on the structural weakening of the dollar. Signals from the options market are even more pronounced. Akshay Saxena, head of Asia FX options trading at Citigroup in Singapore, stated, Since the Treasury announced the repurchase plan, we have seen increased demand in the forex options market for hedging against downside risks of the dollar. A key indicator shows that the premiums for options hedging against a drop in the dollar have risen to their highest level since February in comparison to the premiums for hedging against an increase in the dollar. According to data from DTCC based on contracts valued at $150 million or more, on August 21, demand for put options on the euro against the dollar was 47% higher than that for call options. Barclays Schoeneborn further pointed out that the one-month implied volatility of the Swiss franc has surged to its highest level in over two weeks, while similar indicators for the euro, pound, and Canadian dollar have also risen due to renewed interest from institutional investors in bearish dollar options. The dollar sacrifice narrative takes shape: Wall Street collectively turns bearish Bessent's intervention is altering Wall Street's collective judgment on the dollar's outlook. Citigroup has significantly revised its dollar index forecast for the next three months down from 102.12 to 98.34, citing that the market is pricing in financial repression lowering yields to reduce financing costs at the expense of a weaker currency. Citigroup strategists explicitly recommend that clients use the dollar as a funding currency to invest in high-yield emerging market currencies and believe that gold still has room to rise. Institutions like Franklin Templeton also pointed out that this move by Washington indicates its willingness to sacrifice part of the dollar's strength to control interest costs, which will fuel the trend of de-dollarization. Hartnett from Bank of America has issued an even harsher warning: If Bessent cannot push the 30-year yield below 5%, it will trigger a substantial drop in the dollar and lead to a shift in asset allocation towards shorting risk assets, shorting leverage, and shorting cyclical assets, with these events likely to culminate before the midterm elections in November. Brookings Institution Senior Fellow Brooks warned that forcibly capping long-term bond yields while maintaining the deficit equates to transferring the crisis from the debt market to the currency market, potentially leading to a long-term depreciation crisis similar to that of the Japanese yen. $40 trillion in debt and the AI bond issuance wave: Bessent's toolbox has limited options left The fundamental factors driving up Treasury yields have not changed. The total U.S. public debt has exceeded $40 trillion for the first time. The net issuance of Treasuries in 2026 and 2027 is estimated to be around $2 trillion each. Meanwhile, the AI industry has created an enormous demand for financing from 2026 onwards, tech giants like Alphabet, Amazon, and Meta have issued nearly $220 billion in bonds, more than double the total for the entire year of 2025. J.P. Morgan has warned that the Treasury's repurchase operations tackles the symptoms but not the root cause it essentially involves repurchasing long bonds by issuing more short-term bonds, which is a structural adjustment of debt rather than a true liquidity injection. The $4 billion upper limit for a single repurchase is merely a drop in the bucket in the nearly $40 trillion Treasury market in the U.S.