"The U.S. bond market has long had a dark cloud hanging over it: the threat that one of America’s biggest creditors, most likely China or Japan, might liquidate some of their enormous Treasuries holdings, driving up borrowing costs and triggering an economic and market crash.

Markets have largely shrugged off this doomsday scenario for decades – and for good reason – but the historic joint U.S.-Japan currency intervention last week is a reminder that they shouldn't get complacent.

For years, most experts believed that China, America's main economic and geopolitical rival, would be the country likely to trigger such a crisis. But Beijing’s stash of Treasuries has actually shrunk over the past decade. From a purely financial perspective, Japan, arguably America’s biggest ally in Asia, poses as much of a threat due to the sheer scale of its exposure to U.S. debt. It’s officially America’s biggest international creditor, to the tune of $1.14 trillion.

Of course, no one expects Tokyo to willingly light the fuse on this potential tinderbox, but that doesn't mean accidents can't happen, particularly now. Markets face a perfect storm: extreme weakness in the yen , stress in Japanese government bonds (JGBs) and parts of the Treasury curve , and credibility issues at both the Federal Reserve and Bank of Japan.

This may help explain U.S. Treasury Secretary Scott Bessent’s unconventional joint currency intervention with Japan last Friday to support the ailing yen, which had fallen to a 40-year low against the dollar, while JGB yields hit record highs. "