He elaborated on the carry trade bond bubble, and why the Fed may have interfered.
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This exchange-traded note (similar to an exchange-traded fund) uses the carry trade as an investment discipline.
They will borrow money in low-yielding currencies to invest at higher yields elsewhere (the carry trade).
Optimism had returned to the currency markets, where the carry trade was back with a vengeance.
What if the Bank of Japan suddenly raised short-term interest rates, choking off the yen carry trade?
The greatest risk in the carry trade, however, is a sudden increase in long term interest rates.
Those who play the carry trade game look for the first signs of a long term rate rise.
This can be viewed as the dollar-carry trade, the risk trade, or a hedge against further dollar losses.
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Again, this was a version of the carry trade: they used their cheap financing to buy higher-yielding assets.
The yen carry trade (borrow at low rates to buy stock) still works.
Carry trade bets throughout various asset classes have become overextended and super crowded.
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This so-called "carry trade" tended to push the value of the yen down.
Specifically, a trader who borrowed big in Japanese yen to buy higher-yielding currencies or higher-yielding assets, the so-called yen carry trade.
Three Important Consequences for the Return of the Carry Trade by Addison Wiggin originally appeared in the Daily Reckoning.
Now that nominal interest rates in most developed markets are close to zero, there is less scope for the carry trade.
The carry trade out of Japanese yen for other, higher-interest currencies began to unwind, and the yen gained and the Kiwi dollar came down good.
The problem, however, is that these trades have already become crowded, as they have been popular for too long among carry trade investors.
J's ultra-low 0.25% has fuelled an unhealthy boom in the yen carry trade as investors borrow cheaply in Japan to invest in higher-yielding assets overseas.
Hedge funds and other investors have used the yen carry trade to drive a boom in U.S. credit and equity markets in the last year.
By lowering the fed funds rate this much below Europe, the U.K., China and most emerging markets, the Fed has re-established the dollar carry trade.
The carry trade involves a currency play in which a lower interest rate currency is sold to purchase a currency with a higher interest rate.
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Other special situation players would be hedge funds playing the carry trade game where they buy these Treasuries with short-term loans at 25 basis points.
When other world interest rates fell, carry trade investors bought back yen in order to repay their Japanese debts - and those purchases sent the yen higher.
Then, as banks redirect the capital previously employed in the carry trade into commercial loans, economic growth will increase, but the velocity of money will also rise.
Was the thoroughbred pound in fact a beneficiary of the carry trade, the strategy of borrowing cheaply in Swiss francs or Japanese yen to buy higher-yielding currencies?
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Tokyo has started a new carry trade, in which global investors borrow yen at ultra-low interest rates, exchange it into other currencies and invest for a higher return.
Foreign hedge funds and the like have been unwinding huge positions in the yen carry trade, where they borrowed cheap yen in order to invest in high-yielding currencies.
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