Widow Maker is Dead: And so is Yen Carry Trade

Shorting Japanese government bonds earned its nickname because the trade was obvious — yet so many brave souls tried and failed. 10yr JGB was below 1pct from 1998-2023 and was the first developed country to cut rates to zero in 1995.

On Wall Street anything is possible and if you can't beat'em join'em. Thus was born the yen carry trade — borrowing in ultra-low-rate yen and deploying the proceeds into higher-yielding, "safe" assets like U.S. Treasuries, agencies, and investment-grade credit.

By the mid-2000s, the yen carry trade had already grown to roughly $500bn, laying the groundwork for what would later become the largest and longest carry trade in modern financial history.

The scale is staggering. Estimates suggest roughly $1.3–$1.7 trillion of U.S. and global securities are effectively funded by yen via FX swaps and carry structures.

There are risks that are external exogenous which hit markets very different from internal endogenous risks that build slowly. GFC was the last one of those we had and the markets peaked around 2006-7. Be Safe Be Good and Be Ready for 2026.

Happy New Year!