Tuesday, February 27, 2007
Markets Shudder. Carry Traders shake?
The Clarion’s home to no economists, literally. However, we have been reading some disturbing commentary about risky positions held by hedge funds. Positions so large they threaten market stability, not global market stability, hopefully. But they appear to risk at least regional market stability, as in when Russia defaulted in 1998, followed shortly by huge hedge fund Long Term Capital Management nearly collapsing. (Economically, unless your primary method of commerce is barter, this matters to you, trust us.)
The specific issue of concern here at the offices of the Clarion today, is termed the “Carry Trade.” This position bets on the continued low value of the Japanese Yen.
You may not have noticed. You could be forgiven. Yesterday, the Dow Jones Industrials and the S&P 500 lost their respective year-to-date gains. Losses in these American markets were their greatest since the first day of trading upon re-opening after the September 11th, 2001 attacks. While Asian stockmarkets also declined between 4% and10%, you might have missed that the Japanese currency, the Yen, actually gained 2.3% during this surge of volatility.
This is bad if you been making the “Carry Trade.” The “Carry Trade” works like thus: borrow the Japanese Yen at very low interest rates. The central Bank of Japan’s interest rate is currently 0.25%. That’s not a typo, 1/4 of 1%. You don’t get that rate, but you can still borrow for super cheap in Yen. If you're a hedge fund or a household making a "Carry Trade" you then you take your low interest Yen and buy higer yielding assets, like American bonds, or riskier, but even higher yielding, emerging market debt. All is well, unless...
The Yen goes up sharply. 2.3% today. Tomorrow?
Estimates based on Chicago Mercantile Exchange numbers say the Yen “Carry Trade” may be worth as much as $1 trillion. However, most “Carry Trades” are off-balance sheet. You may recall that delightful phrase, off-balance sheet, popular both with Enron executives and for miscellaneous War expenditures. It is often translated as, “This here is so ugly you don’t even wanna see the numbers on it bleeding all over the balance sheet.”
NY Times summary
Bloomberg Asia
The specific issue of concern here at the offices of the Clarion today, is termed the “Carry Trade.” This position bets on the continued low value of the Japanese Yen.
You may not have noticed. You could be forgiven. Yesterday, the Dow Jones Industrials and the S&P 500 lost their respective year-to-date gains. Losses in these American markets were their greatest since the first day of trading upon re-opening after the September 11th, 2001 attacks. While Asian stockmarkets also declined between 4% and10%, you might have missed that the Japanese currency, the Yen, actually gained 2.3% during this surge of volatility.
This is bad if you been making the “Carry Trade.” The “Carry Trade” works like thus: borrow the Japanese Yen at very low interest rates. The central Bank of Japan’s interest rate is currently 0.25%. That’s not a typo, 1/4 of 1%. You don’t get that rate, but you can still borrow for super cheap in Yen. If you're a hedge fund or a household making a "Carry Trade" you then you take your low interest Yen and buy higer yielding assets, like American bonds, or riskier, but even higher yielding, emerging market debt. All is well, unless...
The Yen goes up sharply. 2.3% today. Tomorrow?
Estimates based on Chicago Mercantile Exchange numbers say the Yen “Carry Trade” may be worth as much as $1 trillion. However, most “Carry Trades” are off-balance sheet. You may recall that delightful phrase, off-balance sheet, popular both with Enron executives and for miscellaneous War expenditures. It is often translated as, “This here is so ugly you don’t even wanna see the numbers on it bleeding all over the balance sheet.”
NY Times summary
Bloomberg Asia
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