US-Iran Tensions Deteriorate Again, Weighing on the Yen and US Treasuries

Daily News

Summary:

An Iranian official said Iran had set a deadline for the United States to fully implement the memorandum of understanding; Japanese government bonds came under heavy selling pressure...

【Highlights】

1. Trump urges Iran to “raise the white flag and surrender,” threatening to bomb Oman if it interferes with efforts related to the Strait of Hormuz.

2. Trump says the US does not seek to extend the memorandum of understanding with Iran.

3. Iranian official says Iran has set a deadline for the United States.

4. Japanese government bonds face heavy selling pressure, while coordinated US-Japan intervention fails to reverse the yen’s decline.

5. Trump’s approval rating falls to 33%, a new low for his second term.

6. Treasury sell-off continues as the 30-year US Treasury yield hits its highest level since 2007.

【Details】

Trump Urges Iran to “Raise the White Flag and Surrender,” Threatens to Bomb Oman if It Interferes with Strait Efforts

In a phone interview with Fox News on Monday, US President Donald Trump said Iran should “raise the white flag” and formally surrender to end the US-Iran war, which has been ongoing for nearly six months. He reiterated that his primary objective is to prevent Iran from obtaining nuclear weapons and acknowledged that he had established direct communication with members of Iran’s Islamic Revolutionary Guard Corps through other channels. Trump also issued a stern warning to Oman, saying that the United States would bomb the country if Oman “interferes” with efforts related to the Strait of Hormuz. The threat is particularly notable because Oman is not a major participant in the conflict, shares waters in the strait with Iran, and has long played a mediating role. There is currently no publicly announced order to launch a military attack on Oman.

Trump Says the US Does Not Seek to Extend the Memorandum of Understanding with Iran

On August 17 local time, US President Donald Trump said that the United States does not seek to extend its memorandum of understanding with Iran. The US and Iran released the formal text of the memorandum on June 17. Article 3 states that the two countries would negotiate and reach a final agreement within a maximum of 60 days. On August 17, the 60-day negotiation period stipulated in the memorandum expired. However, negotiations between the US and Iran had reached an impasse, with no substantive progress made due to major disagreements over issues including the Strait of Hormuz.

Iranian Official Says Iran Has Set a Deadline for the United States

According to a senior Iranian official interviewed on August 17, Iran has given the United States “a deadline of several weeks” to fully implement the US-Iran memorandum of understanding. Iran “will not allow the United States to continue its maritime blockade indefinitely,” the official said. The official added that because efforts to reach a permanent ceasefire agreement with the United States had “reached an impasse,” Iran had decided to shift its policy “from a defensive posture to a fully offensive one.” If diplomatic efforts fail, Iran is prepared to further escalate tensions in the Strait of Hormuz and across the Middle East. Iran’s timeline will be conveyed to the United States through mediating countries.

Japanese Government Bonds Face Heavy Selling Pressure as Joint US-Japan Efforts Fail to Reverse Yen Weakness

Japanese government bonds came under heavy selling pressure from investors amid renewed tensions in the Middle East and growing market concerns that Japan’s fiscal situation could deteriorate further. On August 17, the yield on Japan’s 10-year government bonds continued to rise, briefly reaching 2.93%, its highest level in nearly 30 years. Meanwhile, just two weeks after the United States and Japan jointly intervened in the foreign exchange market, the yen once again approached the 160 yen-per-dollar level.

Foreign exchange intervention can temporarily influence exchange rates, but it is difficult to change Japan’s underlying economic fundamentals. Under the combined pressure of a weak yen, low growth, and high debt, Japan’s economy is facing increasingly severe challenges. The more Japan attempts to support the economy through stimulus measures, the greater the pressure on its fiscal position and exchange rate could become. Therefore, stabilizing the yen ultimately requires optimizing Japan’s economic growth model and fiscal structure. For the Japanese government, the real challenge may never have been simply to “defend the yen,” but rather to restore the Japanese economy’s capacity for sustainable growth.

Trump’s Approval Rating Falls to 33%, a New Low for His Second Term

A joint poll released by Reuters and Ipsos on Monday showed that US President Donald Trump’s approval rating had fallen to 33%, a new low for his second term and down from 35% in an earlier poll conducted this month. The poll found that 64% of Americans disapproved of Trump’s performance in the White House, while around 80% expected the conflict between the United States and Iran to continue for a prolonged period. The nationwide online survey collected responses from 1,166 US adults.

Trump returned to the White House last year with less than half of Americans supporting his presidency. His approval rating has come under pressure this year after he ordered strikes on Iran alongside US ally Israel. The ensuing conflict disrupted one-fifth of global oil trade, drove up gasoline prices, and increased financial pressure on American households. It has also created additional challenges for Trump’s Republican allies as they seek to defend their congressional majority in the November midterm elections.

Treasury Sell-Off Continues as 30-Year US Treasury Yield Hits Highest Level Since 2007

The yield on 30-year US Treasuries rose to its highest level in nearly 20 years, reflecting investor concerns over the rapidly expanding US debt burden, heavy issuance of long-term bonds, and inflation that has remained above the Federal Reserve’s target for much of the past five years. The yield on the 30-year Treasury, often referred to as an ultra-long-term Treasury, rose 3 basis points on Monday to 5.31%, its highest level since 2007. The increase brought it closer to the 5.44% peak reached in 2007, around the beginning of the global financial crisis.

Rising long-term Treasury yields are increasing the US government’s borrowing costs. Investors are demanding higher yields as compensation for the risks associated with rising government debt and persistently elevated inflation, both of which could keep short-term interest rates higher for longer. We have consistently argued against the view that the sell-off in long-term Treasuries will fade quickly, and we maintain that view. Anshul Pradhan, Barclays’ head of US rates strategy, said that a constructive outlook for long-term Treasuries would require some combination of the following factors: a positive fiscal surprise, slower issuance of AI-related bonds, adjustments to the US Treasury Department’s debt issuance strategy, and continued weakness in economic activity data.

【Today’s Key Events】

14:00 (UTC+8) UK June Three-Month ILO Unemployment Rate

17:00 (UTC+8) Eurozone August ZEW Economic Sentiment Indicator

19:45 (UTC+8) ECB Chief Economist Philip Lane Speaks

20:15 (UTC+8) US Weekly ADP Employment Change for the Week Ending August 1

20:30 (UTC+8) US July Housing Starts, Annualized

22:00 (UTC+8) US July Pending Home Sales Index, MoM

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