Dear All,
I have been reading on bloomberg, “Investors exited the so-called carry trade as they cut their appetite for riskier assets in emerging markets and moved into U.S. government debt”, why would that cause people to unwind carry trades when they move into U.S. Government Bonds?, surley people would find it more convenient to stick with borrowing YEN and Buying into Government Bonds…
Unravelling my curiosity would be much appreciated …
The carry trade idea is that one is purchasing higher yielding instruments with funds obtained from borrowing at lower rates. The Yen carry trade, where one borrows Yen at a low rate, converts them in to another currency paying a higher rate, and make the interest rate differential is just one example. Most emerging markets have higher interest rates that most major industrialized economies, so don’t think that the Yen is the only carry trade going on.
It is generally the case that the higher yielding currency is that way because of higher perceived risk. Investors may, therefore, unwind carry trades because they are concerned about market moves against those higher yielding instruments (either exchange rate or asset value changes) that could create losses.
In times of crisis (perceived or otherwise), US Treasury securities are often viewed as a safe haven because of the relative strength of the Dollar and the surety that the government won’t default on its obligations. That is why you will hear reports like that one on Bloomberg.