Yield Curve Uninversion & What Is to Come : Carry Trades
As the inverted yield curve resolves, the unwinding of yen carry trades will accelerate.
I always say that when the yield gap between U.S. and Japanese 2-year bonds narrows, the yen strengthens. If this yen appreciation turns into a trend, the carry traders will face increasing foreign exchange losses. This, in turn, lowers their risk appetite for carry trades.
By the way, the resolution of the 10Y-2Y inverted yield curve is driven by a bull steepener led by falling 2-year yields, so it can also be seen as the starting signal for a yen appreciation trend.
Back to the point, as carry trades unwind and the number of risk-takers decreases, the upward momentum in the market tends to weaken.
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Real Time Fundamental Data Analyst, specialized in treasury bonds and options.
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Boris Johnson : USD will go back up (rebound) after the testing 138. if not worse, 131