Does MM see risk from the “Carry Trade”?
Hi James With Japanese bond rates increasing, is there a risk that the carry trade could unwind and cause turmoil in the credit markets? Could this be a potential left field event? Many thanks Alex
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Answer
Hi Alex,
A carry trade: This is a trading strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return.
After the appreciation of bond yields across the globe we don’t believe the steady appreciation by Japanese JGB yields is going to lead to a “left field” credit problem i.e. rising yields on the JGB’s is simply another piece of the jigsaw as the world evolves away from historically low interest rates. Plus they’re still under 1% which is providing plenty of opportunity for people heavily committed to JGB’s to pare back their exposure.
However, if Japanese yields do keep rising they will provide an ongoing headwind for the countries equities and other risk assets just as we’ve witnessed across most global equity markets over the last few weeks as the US 10-Years, and their peers, powered to fresh decade highs.
