How is the unwinding of the yen carry trade contributing to the current market volatility?
Carry trades are where an investor borrows in a low-yielding currency such as the yen and invests the proceeds in a high-yielding one. A carry trade unwind forces traders to flatten their positions. As the positions are taken on with leverage, a rush for the exits by leveraged traders is exporting cross-asset volatility to the rest of the hedge fund’s book, which forces a de-risking and deleverage of other asset classes.
This is how disorderly panic selloffs happen. Is the panic over? From a technical perspective, both the 10-year U.S. Treasury-JGB yield spread and the yen are testing the support zones, which may serve to stabilize asset prices.