A Japanese Mexican Stand-Off In Rates

Tyler Durden's picture

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. . .'s picture

This is partly why China has been protective of its domestic equity markets and worried about foreign investments after learning from mistakes of the 1997 Asian crisis. Same holds for overly confident economic prospects: unwinding a credit mess of this magnitude, and rebalancing our economy towards more domestic production and less imports will take a long time and there is no easy miracle.


China is rebalancing.  By depressing the yuan, it has subsidized all manner of malinvestment, and so, China is re-balancing by destroying enough wealth through malinvestment to drive the intrinsic value of the yuan to the price of the yuan under the peg.

Brilliant policy.

spanish inquisition's picture

How can we devalue our way to prosperity if China remains pegged? (I don't care for Kudlow, but it's a great catch phrase). Looks like an international monetary game of chicken is afoot..



order6102's picture

Every rates trader on the street knows that trading Japanese rates over the past 10 years has been the most boring job in the business

we here not to have fun - we here to make money!

Gordon_Gekko's picture

Repeat after me: The USA is NOT Japan.

Mr.Kowalski's picture

Japan is getting older and older, and their sovereign debt is 200% of GDP; their budget deficit is as big as ours is.. with an economy half the size of ours. If rates were to go up just a few points on their treasuries, Japan would be in some serious trouble. Worse, would they choose to simply roll over their holdings of US treasuries or would they cash them out to help the problem back home ??

order6102's picture

90-95% of JGB domestic own. We borrow from ourself, and you from everyone else...

Lionhead's picture

Nic, another excellent post & accompanying charts. Concise analysis with no wasted words & thought provoking insights. You "get" it. I look forward to your posts. Thanks!  Keep 'em comin'...

Sinsecato's picture

I know alot of trades/investors have been looking at the US bond markets for clues as to the outcome of the US Dollar carry trade, especially in light of the huge supply being auctioned in recent weeks.  my question: What bond market action could be seen as a positive for maintaining the carry trade?


Most seem to think that a lack of bid for bonds would be a negative for the carry trade --

http://www.zerohedge.com/article/japanese-mexican-stand-rates -- "If capital markets were to abandon all bidding in treasuries is would lead us back to an accelerated unwinding of imbalances, which would be very violent economically. That is why despite all the complaining about excess liquidity, we are very likely to be trading in a range with short brutal sell-offs hurting the longs out of their carry positions"

http://www.zerohedge.com/article/keeping-eye-inflation-expectations -- "If those auctions don’t go so well, and the yield on the longer end of the curve jumps, that might prompt more serious soul searching at the Fed. And uncertainty about how long the Fed will keep the spigots gushing liquidity could push some who’ve been betting on the weak dollar/rising risk trade to take a bit of money off the table."

But what about the other side... what if treasuries continue to recieve strong bids and rates remain low or even move lower?  This scenario would seem to be indicative that the shift of social mood to higher savings, less spending, and more risk aversion continues, endangering any chance at a V shaped economic recovery.

This would mean that, although the cost of the carry trade would remain low (i.e. interest expense on borrowed dollars), continued asset appreciation is highly unlikely, and that Fed liquidity efforts will continue to get stuck in bank's excess reserves rather than make it to the real economy.  This would not bode well for the carry trade, especially if the deleveraging forces seen in July though Nov of 2008 make themselves felt again, forcing most assets lower and pusing the dollar up.

So in conclusion, while the US Dollar carry trade has worked to this point in essence as a fade of the late 2008 moves, giving back much of the Dollar's gain and retracing a portion of the Stock market decline, it seems unclear how the fundamentals can be seen to support a continuation of this trade.

Any comments/thoughts on this would be appreciated.  The question i asked in the beginning is an open question, i presented my answer but am open to considering other possibilities.