The Bond Selloff Spreads Beyond the United States and Pushes Traders Out of Yen Funding

Investors who borrow in a low-yielding currency to buy higher-yielding assets are turning away from the Japanese yen. The Japan Times reports that traders are examining the Swiss franc and the Swedish krona as funding currencies after the yen's recent appreciation. The trigger was the unusual joint United States-Japan operation to support the yen, which made short positions in the currency substantially riskier, because a central bank willing to intervene can move the exchange rate against a crowded trade without warning.

Two shifts are happening at once. The Bank of Japan is gradually withdrawing the ultra-loose settings that made yen borrowing nearly free, and the governments of Japan and the United States have shown they will act directly in the currency market. Together, these remove the two conditions the trade depended on: cheap borrowing costs and a predictable exchange rate.

The other side of the same adjustment is visible in how asset managers now think about bonds. In Israel, provident and study funds returned 1.4 percent in August, with equity-weighted funds up 2.4 percent on the strength of the rally in United States shares, but managers warned that rising American yields are making bonds a genuine alternative to equities again and a reason to moderate expectations for the coming months.

That is the long-end revolt working through investment portfolios. When sovereign debt pays close to 5 percent, the case for holding richly valued equities, or for borrowing cheaply to seek higher returns elsewhere, weakens on the arithmetic alone. The carry trade, which functioned for two decades as a global channel for transmitting Japanese monetary easing, is being dismantled by the same normalization that is repricing bonds everywhere.