This week’s huge selloff in global markets, triggered by an unwinding of yen-funded trades, is far from over and could eventually spread to credit markets, impair some banks and possibly hurt the U.S. dollar, fund managers say.
“I think we’ve seen the panic stage of forced liquidation etc, but going forward I’m sure there will still be investors that are now looking to at least reduce exposure,” said Khoon Goh, head of Asia research at ANZ.Hundreds of billions of yen found their way into juicy carry trades over more than a decade when Japanese interest rates were at zero. And on top of that, there are carry trades funded in cheap Swiss francs and China’s yuan.
“One of the things we’re watching is if any banks are under pressure right now, because they’ve been lending too much, either to hedge funds or retail investors. It’s buried under the larger equation of how we look at the carry trade.” UBS Japan macro strategist James Malcolm reckons the trade is worth about $500-billion and less than half has been unwound so far; Nikolaos Panigirtzoglou and other analysts at J.P. Morgan put the yen carry trade at $4-trillion.
Some of the answers to that question, and clues to which shoe might drop next, lie in bonds, which have not sold off as aggressively as equities even in the riskiest tranches. “I struggle to square credit bonds largely unmoved versus other risk markets,” said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments. “Assuming equities continue to struggle, I suspect there will be some adjustment in credit space.”