Global Bond Rout Linked to Yen Carry Trade Unwinding

The unwinding of the Japanese yen USD FXY carry trade is causing a global bond market rout, according to market strategist Ed Yardeni. This trade allowed governments to run massive budget deficits without incurring high borrowing costs.

In the past, investors would borrow yen at rock-bottom rates and use the proceeds to buy higher-yielding assets worldwide, particularly U.S. Treasuries SHY TLT and other government debt.

The Bank of Japan's decision to raise its policy rate has blown up this highly lucrative trade, causing a margin squeeze for traders holding yen-denominated debt.

This has triggered a frantic, automated unwinding process, with traders forced to sell their global positions to pay back their yen loans.