Japan's bond market turmoil is unwinding the yen carry trade and forcing Japanese investors to sell US Treasuries. With $1.1 trillion in holdings being pulled back and the Fed ending quantitative tightening, liquidity is tightening and speculative assets like Bitcoin are selling off.
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This is a massive deal. Japan has been the anchor of the yen carry trade, an anchor for a lot of central banks, institutions around the globe. One of the main reasons that crypto crashed last night with really no headline news. What this means when the yields surge, that means people are selling their bonds in Japan. So the same day the Fed is ending quantitative tightening and going to more neutral policy stance, December 1st today, and the Japan yen carry trade a little bit. Japanese institutions hold around $1.1 trillion in US Treasury securities, the largest foreign When domestic yields rise from nothing to nearly 2%, the math changes. Let me jump down. Okay, the Federal Reserve terminates QT precisely as the U.S. Treasury requires record issuance to finance its $1.8 trillion in deficits. Okay, Japan has been one of the biggest buyers. 2 of the 3 largest buyers of U.S. government debt are stepping back simultaneously. The 3rd largest buyer is China, which also is stepping back. When the world's creditor nations stop funding the world's debtor nations at artificially suppressed rates, the entire post-2008 financial architecture must reprice. We're seeing some of that happen right now. This major problem in the bond market. A long time, this yen carry trade was people would borrow from Japan's central bank at relatively low rates and go buy bonds at other rates. A really good arbitrage. But when this starts jacking up, people are forced to sell and unravel this Arbitrage in the market of bond trading. This does is tighten liquidity and make speculative assets like Bitcoin drop really quickly because people have to sell and get out of those positions because they have no liquidity anymore because the yen carry trade is being unraveled. Remember back to August 5th, 2024. This is when the yen carry trade blew up the markets. It was the single largest spike in the VIX ever. Look at this chart. This is the VIX volatility index. People were calling this Black Monday. The world was ending. It was crazy. Shortly thereafter, people unraveled their carry trade and then went back a little bit into it. And here we are. It was that little blip. That was the yen carry trade disaster of 2024 that caused so much panic and fear. Then we went up and up and up and up. And then we had the tariff wars. And now we're up here. We have a new Fed chair looking to be announced this month. We put in in May pending Congress approval. That's going to be very dovish on the markets. I look back at speculative assets like crypto, for example, and I run a crypto fund. I go, well, governments are going to keep spending money. Yeah, this sucks in the short term, but we got a lot of good news coming.
