Japan's Steep Yield Curve Creates Reverse Carry Trade Opportunity

A steep yield curve in Japan has created an opportunity for 'reverse carry' trades, where investors buy ultra-long Japanese government bonds and hedge their yen exposure back into dollars or other developed-market currencies.

Rong Ren Goh, a fixed income portfolio manager at Eastspring Investments, said that this trade could potentially give investors higher yields than comparable bonds in their home markets. The 30-year Japanese government bond above 4% gives an FX-hedged yield 100 to 200 basis points higher when swapped into any developed-market currency.

The traditional yen-funded carry trade, where investors borrow cheaply in the Japanese currency to buy higher-yielding foreign assets, is no longer a 'no-brainer' due to Japan's policy rate expected to reach around 2% from 1.25% currently.