“The yen carry trade remains the epicenter of everything in markets right now”
The way it unfolded so rapidly — and just as quickly faded out — is exposing how vulnerable markets are to a strategy that hedge funds exploited to bankroll hundreds of billions of dollars of bets in virtually every corner of the world.
The yen carry trade was a sure-fire recipe for easy profits:
Just borrow in Japan, then plow it into Mexican bonds yielding over 10%, Nvidia’s soaring shares or even Bitcoin.
Then came the spark: an interest rate hike in Japan. The BOJ’s benchmark is now 0.25%
Then, seemingly all at once, investors bailed out of the trade
According to GlobalData TS Lombard, there was some $1.1 trillion piled into the strategy, assuming all overseas borrowing in Japan since the end of 2022 was used to finance it and domestic investors used leverage for their foreign purchases.
“Further carry-trade unwinding seems likely but the most significant and destructive part of this bubble-burst is now behind us,” Steven Barrow
The bubble, as Barrow called it, has decades-old roots. In the 1990s, with Japan’s economy shadowed by a real estate crash, policymakers there slashed interest rates to zero.
The trade has even been blamed by International Monetary Fund economists for playing a part in the 2008 financial crisis.
By 2016, the BOJ had nevertheless pushed rates into below zero.
When the yen started rebounding from its weakest levels in decades, that created a feedback loop as traders unwound carry trades to lock in their gains — pushing the yen up further as investors purchased it to close out their loans.
Matthew Burgess, Maria Elena Vizcaino, and Vinicius Andrade Bloomberg 12 August 2024
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