The carry trade’s bond doppelganger

MKTSTK

The carry trade is an integral part of global financial markets. While in the past we highlighted the relationship between the Yen and the stock market, the simplest form of the carry trade consists of borrowing money at a low interest rate in one currency and investing it at a higher rate in another currency.

Given it’s deep liquidity, the US Treasury curve is a favored destination for flows related to the carry trade. When interest rates rise in the US it becomes increasingly attractive to borrow money in a cheap currency (such as the Yen) and use the proceeds to finance the purchase of a Treasury bond. For example, late last week yields on the US 30 Year Treasury bond rose above 2.5% for the first time since mid-January. At the same time the value of the Yen fell sharply against the dollar.

The relationship between the Yen and…

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