Japan's Rate Hike Triggers Global Bond Rout
The global bond market has been experiencing a significant rout since 2024, and some analysts believe that Japan is at the center of this trend.
The 'yen-carry trade' was a key feature of global financial markets from around 2012 to 2024. It relied on two main factors: extremely low Japanese interest rates and either a weak or relatively stable yen. Hedge funds could borrow money cheaply in yen, convert it into other currencies, and buy government bonds in those currencies.
However, both pillars of this trade have started to crumble. The Bank of Japan (BOJ) has raised its official policy rate from near zero to 1.0%, the highest since 1995, with another 25bps hike expected soon. This increase in interest rates has made borrowing in yen more expensive and has led to a strengthening of the yen.
As a result, traders are being forced to unwind their yen-carry trades, which may be contributing to the global bond market's downturn since 2024.