Treasury Yields Are EXPLODING!! (Something BIG Is Happening)
Summary
TLDRThe video discusses a significant event in the financial markets, focusing on the dramatic movement of the Japanese Yen and the 10-year U.S. Treasury yield. The host speculates on the correlation between the Yen's crash and the spike in treasury yields, suggesting a possible sell-off triggered by the yen breaking past the 160 mark. Expert Jeff Snyder is invited to provide insights into the situation, discussing potential systemic risks for Japanese banks due to their diversified funding sources and the negative carry from U.S. Treasury investments. The conversation highlights the interconnected risks in the global banking system.
Takeaways
- đ The Japanese Yen is experiencing a significant devaluation against the US dollar, which some describe as a crash.
- đ There is a simultaneous and dramatic rise in the 10-year US Treasury yield, which has spiked by almost eight basis points in a short time frame.
- đ The speaker suggests a correlation between the Yen's crash and the rise in Treasury yields, but the exact relationship is not immediately clear.
- đ€ The speaker speculates that the Yen's movement may be causing the 10-year Treasury yield to spike, rather than the other way around.
- đŠ There may be large financial institutions with positions affected by the Yen's movement, possibly triggering a selloff in treasuries when the Yen broke through certain thresholds.
- đ The situation has global implications, especially for Japan's economy, which is heavily reliant on importing energy priced in US dollars.
- đ The devaluation of the Yen could lead to increased costs for imported goods, potentially exacerbating inflationary pressures.
- đĄ The speaker highlights the difficulty in understanding market movements at this scale and the importance of seeking expert insights, such as from Jeff Snyder.
- đŒ The Japanese Central Bank's attempts to intervene and stabilize the Yen have been met with limited success, suggesting the market forces are stronger.
- đŒ The discussion points to systemic risks for Japanese banks and potentially global financial institutions due to interconnected economies and banking systems.
- đ The conversation underscores the complexity of global finance and the challenges in predicting and reacting to market movements.
Q & A
What is the main focus of the discussion in the video script?
-The main focus of the discussion is the unusual movement in the Japanese Yen and the 10-year U.S. Treasury yield, and the potential correlation between the two.
What is the significance of the Japanese Yen crashing?
-The crashing of the Japanese Yen is significant as it indicates a loss of purchasing power relative to the U.S. dollar, which can impact Japan's economy, particularly in terms of importing energy priced in U.S. dollars.
What does the speaker suggest is causing the spike in the 10-year Treasury yield?
-The speaker suggests that the spike in the 10-year Treasury yield may be a result of the Japanese Yen's crash, potentially triggered by large financial institutions selling off treasuries due to the Yen breaking through certain thresholds.
What role did the Japanese Central planners play in the Yen's value?
-The Japanese Central planners attempted to prop up the Yen by intervening in the market when it was crashing against the dollar, but their efforts seemed to have been ineffective as the Yen continued to weaken.
Why did the Japanese Central planners intervene in the Yen's value?
-The Japanese Central planners intervened to stabilize the market, believing that the fundamentals should lead to a stronger Yen, not a weaker one, and that the market was not accurately reflecting these fundamentals.
What is the potential impact of the Yen's devaluation on Japan's economy?
-The devaluation of the Yen could lead to increased costs for imported goods, particularly energy, which is a significant portion of Japan's imports, potentially causing inflationary pressures and economic strain.
What is the relationship between the Yen and the U.S. dollar as discussed in the script?
-The relationship discussed is that as the Yen's value decreases relative to the U.S. dollar, its purchasing power diminishes, which can affect Japan's ability to import goods priced in U.S. dollars.
What does the speaker suggest about the actions of global financial institutions in response to the Yen's movement?
-The speaker suggests that global financial institutions may have been caught off guard by the Yen's movement, leading to a selloff in treasuries and a spike in the 10-year Treasury yield.
What is the potential systemic risk for global banks mentioned in the script?
-The potential systemic risk is that the interconnected banking system could be affected by the Yen's devaluation and the resulting economic strain on Japan, which might lead to a broader economic impact.
What is the significance of the 10-year Treasury yield spike in the context of the script?
-The spike in the 10-year Treasury yield is significant as it indicates a large movement in the bond market, which can affect interest rates and have broader implications for the economy and financial markets.
What does the speaker suggest about the future movement of the Yen?
-The speaker suggests that the Yen may continue to weaken, potentially reaching levels as high as 200 or 250 against the U.S. dollar, based on historical patterns and current market dynamics.
Outlines
đ Yen Crash and 10-Year Treasury Yield Surge
The speaker opens with an urgent tone about significant movements in the financial markets, specifically the crash of the Japanese Yen and a dramatic rise in the 10-year treasury yield. They mention the difficulty in correlating these events and hint at a potential connection. The speaker plans to discuss this with financial expert Jeff Snyder later in the show. The summary of the 10-year treasury yield chart indicates a sharp increase from 4.2% to almost 4.4% within days, with an especially steep rise in the morning of the day being discussed. The dollar-Yen chart shows a similar pattern, with the Yen weakening past the 160 mark against the dollar, contrary to the Japanese Central Bank's interventions aimed at stabilizing it.
đ€ Central Planners' Missteps and Market Reactions
This paragraph delves into the Japanese Central Bank's failed attempts to prop up the Yen by spending $60 billion, which the market swiftly negated. The speaker references a conversation with Steve, who predicted the Yen's devaluation to 200 per dollar, suggesting that the Central Bank's actions are more about managing an 'orderly' devaluation rather than preventing it. The speaker speculates that the Yen's movement might be causing the spike in the 10-year treasury yield, possibly due to large financial institutions having positions that include treasuries and bets on the Yen's value, which are now being sold off.
đ Global Implications of Yen Devaluation
The speaker discusses the broader implications of the Yen's devaluation, particularly for Japan's import-dependent economy, which will face higher costs for energy priced in US dollars. They consider the systemic risk this poses to global banks and economies due to interconnected banking systems. The conversation then shifts to Jeff Snyder joining the live stream, where the speaker recaps the treasury yield and Yen's movements, suggesting a possible trigger from financial institutions selling off treasuries as the Yen broke past the 160 mark.
đ Analyzing the Correlation Between Yen and Treasury Yields
Jeff Snyder provides his insights, suggesting that the correlation between the Yen's value and the 10-year treasury yields might be due to Japanese financial firms liquidating treasury positions as the Yen weakens, possibly to acquire dollars to support the Yen. He discusses the possibility of the Japanese Ministry of Finance selling treasuries to intervene in the currency market, but notes that this would typically strengthen the Yen in the short term, which is not observed. Snyder also touches on the challenges faced by Japanese banks in managing their funding costs amidst fluctuating interest rates.
đ The Risky Shift in Japanese Banks' Investments
The conversation continues with an exploration of Japanese banks' strategies in response to funding costs and interest rate changes. As the Federal Reserve's rates are expected to remain high, these banks are selling US treasuries to invest in higher-yielding, riskier assets like single-A rated CLOs (Collateralized Loan Obligations). The rationale behind this shift and the potential risks involved, including the impact of a US recession on these investments, are discussed. The banks are essentially taking on more risk to chase higher yields, which could lead to systemic issues if the market turns sour.
â ïž Systemic Risks and the Japanese Economy's Challenges
The final paragraph wraps up the discussion by examining the systemic risks posed by the Japanese banks' strategies and the challenges faced by the Japanese economy. With the Yen weakening significantly despite interest rate differentials, the speaker and Jeff Snyder consider the potential for a self-reinforcing economic spiral that could exacerbate existing issues. They also discuss the risks associated with the banks' investments in CLOs, and how a downturn in the US economy could lead to a sell-off and a scramble for the 'emergency exit' in the market.
Mindmap
Keywords
đĄTreasury market
đĄJapanese Yen
đĄYield
đĄBasis points
đĄFX markets
đĄCentral planners
đĄHedge funds
đĄTreasuries
đĄInverted yield curve
đĄSystemic risk
đĄCommercial paper
Highlights
The Japanese Yen is experiencing a significant crash against the US dollar.
The 10-year treasury yield is experiencing a dramatic increase, possibly correlated with the Yen's crash.
Efforts by Japanese central planners to stabilize the Yen have been met with market resistance, leading to a further devaluation.
A potential trigger for the treasury yield spike could be the Yen breaking the 160 mark, affecting financial institutions' positions.
Japanese banks might be liquidating treasury positions due to unattractive yields in the current economic climate.
The Yen's devaluation could impact Japan's ability to import energy, priced in US dollars, exacerbating economic strain.
The DXY (US Dollar Index) remains high, but the focus should be on the dollar-Yen pair due to its potential systemic risks.
Jeff Snyder suggests that Japanese financial firms may be selling treasuries due to high funding costs and negative carry in the current rate environment.
The inverted yield curve and the Federal Reserve's rate policy are influencing the funding strategies of Japanese banks.
Japanese banks are facing the dilemma of either shutting down operations or taking on more risk to achieve higher yields.
The potential for a US recession poses a significant risk to the Japanese banks' investments in riskier assets like CLOs.
Spread tightening in the market may be misleading investors into a false sense of security regarding riskier assets.
A systemic risk analysis suggests that the interconnected banking system could be vulnerable to shocks from the Japanese economy.
The Bank of Japan's policy decisions are contributing to a self-reinforcing economic spiral that could further weaken the Yen.
The potential devaluation of the Yen to 200 against the dollar could have significant implications for Japanese firms' dollar-denominated assets.
Jeff Snyder's insights from Eurodollar University highlight the complexities and risks in the current financial markets.
Transcripts
hello fellow Rebel capitals hope you're
well so we have huge news right now in
the treasury market and with the
Japanese Yen and the dollar the yen is
well to say that it's crashing might
even be an understatement but what's
bizarre is what's happening
simultaneously in yields specifically
with the 10year treasury yield that's
exploding to the side let's go over to a
couple charts and you'll see exactly
what I'm referring to this is happening
in real time right now as we speak and
it it has to be
correlated it's very difficult when you
get to this level to connect the dots
and put the pieces of the puzzle
together I'm G to do my very best but
Josh as we speak is reaching out to Jeff
Snyder to try to get him on the show
later on today hopefully 2 pm eastern
time so he can give us some insight
as to what he thinks is happening with
the the dollar Yen and how this is
playing out with the 10year treasury
yield so let's go over to some charts
and you'll see exactly what I'm
referring
to first let's start with the 10year
treasury yield and this is what caught
my eye I went to the gym this morning
and I I got back to my office like I
usually do just scanning the charts and
looking at CNBC and when I saw the
10-year treasury yield I was like whoa
whoa whoa what is going on here so
that's the first thing that caught my
eye and look at this daily chart this is
the one that Josh used in the thumbnail
so right
around see where are we here 7 and I
would guess this is Eastern time so
7:25 this morning we were right
around you know this might have been
before the I'm not sure how the FX
markets work but this might have been
before the market opened we were right
around 440 which is a big move up it's
actually zoom out to a 5-day
chart and you can see five days ago we
were
423 and I remember last week we got sub
4.2 remember we got like
4.19 and so this is a huge move up just
in the last few days but then today just
a few minutes ago it just goes parabolic
and you may say George that's not that
big of a move wrong wrong
the seven basis points eight basis
points within the matter of let's just
see how long
here yeah maybe it was in the market
just opened but it's say in the
last in the last couple hours we'll just
ballpark it the yields on the 10year
treasury have gone up by almost eight
basis points that that is a massive move
a massive move in treasuries and so this
was the first chart that I discovered
the first one that caught my eye so then
I try to think okay what what is causing
this to happen and the only other
chart that I can find that lines up with
this directly would be a chart of dollar
Yen so let's go over
there and you'll notice it's almost the
exact same chart almost
identical something happened right
around here and it might have been the
fact so let's rewind you guys know that
maybe a month ago the Japanese Central
planners came in to try to prop up the
Yen because it was just tanking crashing
against the dollar and they said it
didn't they didn't want it to go above
160 so in so the higher the number
the lower the value the yen is to the
dollar because this is saying it's 161
yen to $1 so let's take it to an extreme
if it goes to a th Yen per dollar then
it's lost a lot of purchasing power if
it goes to parody one to one then it's
gained a ton of purchasing power so you
got to remember the higher this number
the weaker the yen is getting versus the
dollar so the officials came in the
central planners and because it was
going straight down to 160 and the like
whoa no no no no no we want to stabilize
the market and of course the funny part
was and they always do this is they came
out and said well this doesn't match up
with the fundamentals because we Central
planners are smarter than the market and
we know that the fundamentals should
lead to a stronger Yen not a weaker Yen
and remember this is the time when they
were raising rates well you want to call
it that they took it from like negative
10 basis points up to like positive
basis I want to call that raising rates
but I guess technically that's what it
is so there's say oh we got this
interest rate differentials because
we're raising rates relative to the
United States because they're pausing
and therefore you should see the Yen
strengthen but what happens is the Yen
crashes even more and they're like oh
time out time out and their excuse is
that the market just doesn't know what's
doing and therefore we Central planners
know where the price should be for the
Yen so we're going to come in dropped
$60
billion propping it up and then actually
let me look at this chart we can go back
and just see it right here in real
time so this is when it was crashing I
would assume right around here so end of
April and that's when the central
planners came in and then it just
immediately dropped and then of course
they're padding themselves on the back
oh job well done job well done and then
the market says yeah good job there
buddy way to drop $60 billion and just
flush it straight down the toilet now
let me give you the right hook from
Tyson boom goes straight back up to 155
goes up to
157 and then lately 157 158 159 and then
today breaks straight through to 160 and
it doesn't just stop at 160 it's now
broken through all the way to 161 we're
at 161.5
two and what's funny is when I was in St
Bart's last was when the central
planners were trying to prop up the Yen
and I had this discussion with Steve as
you would imagine and he said look
George I have seen this happen over and
over and over again over the past 40
years he goes I'll tell you exactly
where the yen is going it's going
straight to 200 and I said okay well how
does this usually play out he goes they
they always try to fight the market and
the market always wins it's inevitable
the only thing the Japanese officials
are and this was according to him he
goes they know that they can't fight the
market they're and they know it's going
to 200 if not 250 300 who knows talk
about the yend of the dollar he said
they're just trying to make sure that it
goes
down and devalues in an orderly fashion
they said they just don't want it to go
to 200 in a week they want it to go to
200 in the span of six months he goes
that's why they're coming out and
dropping the 60 billion and then they're
just coming up with some narrative to
make the market try to believe that uh
they're going to intervene every time it
gets over to 160 so you better not sell
those Yen again it's just a scop it's
the exact same thing the Federal Reserve
does
so it's interesting now to see what
Steve was saying pretty much play out in
real time but this doesn't help us
understand the relationship between the
Yen and the treasury yields and I think
and again I'm spitballing this guys I
really want to get Snyder on this
afternoon so he can give us some deeper
insights but I would assume this is the
Yen causing the 10 year to spike it it's
not the spike in the 10year causing the
yen to crash I think it starts first and
foremost with the Yen that's my base
case that's my gut instinct the reason I
say
that is because I I would assume that
you've got a lot of positions out there
by hedge funds financial institutions
big huge euro dollar banks that are
predicated upon the central planners
intervening every single time we get
close to
160 so what happens is if the Yen breaks
through 160 like it just did today and
goes 161 maybe even higher this triggers
all of their positions to sell and I
would assume that a lot of those
positions in some way shape or form
include treasuries
so I I don't know and again I I need to
really think through kind of how these
Global banks are constructing their
balance
sheet in a way that would include
treasuries and
also pertain to a bet on the Yen that
the central planners mean what they
say and therefore when it shoots up past
160 161 all of a sudden these positions
are upside down and it triggers all of
the
selling with the treasuries that are
somehow involved that selling is what
makes the yields go higher because
obviously there's an inverse
relationship between the yield and the
price so selling more quickly more
Supply than demand price down yields up
and and just looking at these charts I I
think the Yen somehow triggered some
sort
of bet that was being made by these
massive Global financial institutions
where they were completely caught off
sides why because they don't have the
experience of my good friend Steve in St
BS or they would have known what was
going to happen they would have been
able to this a mile away so another
thing that's interesting is what this
does to not just the dollar globally but
think about this J Japan has to import
the majority of their energy and that
energy is priced
in you guys know it in US dollars so
just think about this for a moment if
you're having to import let's just say a
barrel of oil at
$80 and let's just say the n is at a
parody just to we'll take it to an
extreme to make it easy to follow so $1
equals one yen so you import that barrel
of oil that's $80 that costs you 80 of
your
Yen okay but now what happens if the Yen
goes to let's just take it to a huge
extrem here and say it goes to a th okay
now it costs you $80,000
Yen for that one barrel of oil but your
cash flows denominated in Yen have not
gone up to the degree to which you can
afford the 80,000 yen per barrel of
oil and let's take it to the next step
what happens if the dollar price of oil
goes up to
100 at the exact same time well then
you're not just getting the right hook
from Tyson you're getting the left
uppercut as
well and that's what we could see so I
looked at the dxy the dxy is still at
105.8 which is high it's getting up
there again that's for sure but we
really got to get hyperfocused on dollar
Yen because this the the the dollar
going to 160 170 180 just from the
simple standpoint of them importing
energy and needing
dollars could cause a huge
blowup in Japan that could have systemic
risk for all of these Global Banks which
could bleed over into other
economies because the the banking system
and therefore these economies are so
interconnected really really fascinating
stuff George we have some breaking news
Jeff is joining right now oh good good
good get him on that's fantastic all
right so just keep talking for about a
minute and a half while he joins the
live this is why this is why you got to
stay tuned to the rebel capitalist show
see I can just make these things
happen ah it's great to have good
friends in the industry like Jeff Snyder
that's for sure so let's see why don't
we go back to these oh there he is right
there we'll get him up
oh my goodness gracious we can see the
lower part of Jeff Snyder Jeff you're on
the live stream yeah it's it's accessing
the wrong
camera that's a
oh from your lower quarter almost looks
like roaring Kitty Jeff oh
no I don't think that's a good
thing well regardless it we don't need
the video bud what's going on with Yen
10year Treasury I did you hear any of
the live stream did did uh Josh give you
any update as to what I was talking
about no I was actually on with Eric bz
Maan we just did an interview talking
about macro stuff so I missed I missed
what you were talking about George well
I just saw the 10year treasury yield
Skyrocket this morning I mean we're up
what eight basis points uh in the last
couple hours so that caught my eye and
I'm like okay something weird is
happening here and then I went over and
looked at there you go there we got it
and then we I I looked at dollar Yen and
I'm like whoa whoa whoa wait a minute
here dollar Yen just not only broke
above 160 but it broke above 161 and the
chart on dollar Yen the daily chart
looks almost identical to the 10year
treasury so I thought okay there has to
be something going on there where that
Yen breaking above the 160 Mark
triggered some sort of huge selloff in
the 10year treasuries and I was saying
on the live stream I didn't know if some
of these you know Global financial
institutions were caught off sides
because they believed the central
planners in Japan that they were going
to keep the Yen under 160 so they had
all these bets that somehow involved
10year treasuries and therefore when the
Yen broke 160 this morning went 161
they're like holy and then they got
to sell all their 10-year treasuries
that Were Somehow involved which made
the yield Spike in tandem with that Yen
am am I close there or am I way off I
mean it's impossible to tell on a short
run basis you know there's no way to say
exactly for sure but I think you go back
not just today but Friday too because
you had that pretty intense sell off on
Friday that seemed out of character for
the regular news flow that that came in
Friday I mean Friday had some decent
macroeconomic data and things like that
but not that would you would see what
was it a 11 12 basis point move on
Friday and then had to see it come in
today um what got my attention on the
intraday chart intraday chart George was
that you get this New York signal
because the selling in the treasury
starts at 8:30 sometimes 9:30 in the
morning which is usually kind of a New
York selling okay which is ironically
potentially a Japanese signal because
Japanese banks have a ton fact all the
major banks have New York branches set
up for reasons of trading in New York so
if there is a correlation if there is a
Japanese reason for selling treasuries
that where it would happen it would show
up in the New York City Market and it
might be um not necessarily that
Japanese Financial firms are surprised
by the Yen going lower I think it might
be them starting to to um liquidate some
of their treasury positions because like
noran chin bank had said um treasuries
you just don't offer enough offer enough
yield and with um borrowing costs kind
of hanging in there um they have to
liquidate their treasuries to roll into
mostly basically junk corporate debt um
so it may be as the yend goes low that's
triggering some kind of a trading signal
potentially it could also be
liquidations I mean if the ministry of
finances is operating in the Yen Market
um they would be selling uh selling
treasuries but that would be you would
you would at least expect if they were
if the Japanese government was selling
treasuries and liquidating them to to
sell dollars into the marketplace the
end would be going in the opposite
direction it would at least be
strengthening on a short run basis so
that doesn't seem to be likely either um
let me explain that real quick Jeff so
what what he's saying there guys is the
Ministry of Finance in Japan has a ton
of treasuries and they need dollars to
prop up the Yen so they're selling those
treasuries to get those dollars they
need to sell them into the market uh and
and byy the end to try to prop up the
currency to avoid it going above 160
yeah and that will have a short run
impact like it did uh what end of April
early May when the Ministry of Finance
last intervene I mean they threw billion
down the toilet doing it but in the
short run the Yen did strengthen pretty
substantially for a couple of days
before it turned around and went went
back lower again so if if there was
intervention and they were selling
treasuries in order to fund that
intervention we would expect the yent to
go higher not lower which to me suggests
that if there is a Japanese connection
that's going to be Japanese financials
um they're selling treasuries for I for
reasons I don't know I don't know if
we'll ever know but um if they are
liquidating treasuries that would make
sense because they've been talking about
doing so for quite some time and if and
when they do start doing that they've
actually been doing it but if they start
doing more of it um then you would it
would it would have a short run impact
on the treasury
market okay so this could be the
Ministry of Finance it could be some of
these Japanese banks that I don't think
it's the Ministry of Finance because
because they would be then selling those
dollars and buying Yen and that doesn't
seem to be maybe they just haven't done
it yet maybe they're waiting for
tomorrow I don't know I don't know
that's not how the bureaucrats work the
bureaucrats they they get they you know
they have a policy meeting they develop
a list and then they give their Traders
a list okay this is the time you have to
trade this is x amount of dollars you
have to sell this is x amount of Yen
that you can buy and we'll give you a
little bit of an errow rate yes they're
not
Nimble okay so let let's go back to
noren chukin for a moment there because
this is something I was emailing you
about and I've been so busy for a
variety of reasons that Josh knows here
I won't this close that on a live stream
but all good stuff so I didn't uh have
the chance to go through the email
thread but my question was okay that the
funding costs would seem like they're
coming from uh the borrowing dollars so
why were they borrowing dollars if they
have the yen to actually buy the dollars
and you were saying well there's
actually a cost to turn those yen into
Dollars even if you're not borrowing
them to begin with but how does that
cost fluctuate with the FED funds rate
well it depends on what angle I mean got
remember these Japanese banks are not
doing one thing or another they're doing
everything they have a diversified
Diversified their funding sources so
they are swapping into US dollars using
Yen's collateral that's one way like I
said they set up New York branches that
are actually US banks that are just
branches of their parent company and
then they'll borrow in unsecured fashion
used to be fed funds and things like
that but now they might they've been
Japanese banks in particular have been
their New York branches have been
selling tons of commercial paper
so yeah so it's not like they take the
Yen and buy dollars with the Yen it's
that they're using Yen for collateral to
borrow those dollars and therefore the
funding cost would be borrowing the
dollars using the Yen as collateral yeah
it doesn't even no matter how you
actually structure it that that's at the
end of the day you have to acquire
dollars which means you have to pay a
cost somewhere um because there's no
there's no free free lunch here yeah so
the Japanese banks are divers they've
Diversified funding sources so they're
they're borrowing and buying and doing
swapping into dollars in all different
ways so the funding cost or the cost of
being able to do that is different for
each different Market but there's
there's generally a um a common factor
through all of it but where the Japanese
banks are running into problems is in
some of these U especially the swaps
that are based on suur and short-term US
dollar money rates which follow along
with the Federal Reserves benchmarks and
the in the front end of the curve some
of those rates have gone way up and with
treasury yields not really going up as
far because the curve is inverted
treasury market hasn't followed the FED
that means you have a negative carry so
if you're borrowing at suur and you're
reinvesting at the 10-year treasury
you're losing money you're losing money
every day that you do that because
you're rolling over these transactions
every day what the Japanese Banks
especially noran chin has said well we
kind of anticipated this was going to
happen but we were expecting that
funding costs would go lower again and
with the bond market rally it looked
like short-term rates were going to go
down last year they're like okay here
comes the relief and the funding cost we
don't need to do anything but then you
know everything happened cpis the
Federal Reserve got cold feed on rate
Cuts everything else the Japanese Banks
as Bankers as as fiduciaries they said J
Powell isn't changing his mind so we
have to assume that the FED funds rate
and therefore all the short-term money
rates are going to be higher for longer
which means we cannot continue to pay a
negative carry we cannot continue to pay
suur and get only the 10y year US
Treasury especially the 10 year US
Treasury is low so they have to sell
their treasuries to buy higher US dollar
yielding assets and that's basically
riskier and riskier junk corporates I
was gonna say just not higher yield
higher risk well that's the only way to
get the higher yield and so they've
they've essentially rationalize this
because before they've done this before
there's been times like in 2019 when the
yield curve inverted they said okay
we'll start buying Clos but we're only
going to buy the senior pieces we're
only going to buy the triaa rated top
tier highest class of of are starting to
blow up well that's the thing so so they
you continue to have to reach for yield
and you continue to get riskier and over
the last year a lot of the Japanese
banks have said we're going to buy maybe
double a single a and there's a lot I
mean there's Marketplace rationale for
it
because certainly the clo sellers will
tell you that there's really no risk be
no risk no difference in Risk between
doublea and single a and triaa but you
do get extra return so if you
rationalize that behavior as okay I'm
going to get extra return in a single a
and there's no additional risk why
wouldn't I do that I did a story on this
the other day there's AAA tranches that
are now experiencing losses uh due to
the underlying asset being commercial
real estate and and you know if that AAA
takes a 20% loss and Josh we did a video
on this the other day like I was saying
uh the everything below that gets
completely wiped out but but again it
even if it doesn't those aaa's are still
experiencing losses in some cases but
the rationalization that they'll make is
that that's just commercial real estate
the rest of the rest of the US junk
Market is completely fine so if we stay
away from anything that's exposed to CR
we can buy a single a rated junk
corporate debt clo and be trun of that
and we'll be completely fine I mean you
know how this goes George and every
every bubbly period you convince
yourself that I'm doing the right thing
and you convince yourself you're doing
the right thing because you have to
right that's where we get into these
Japanese Banks with their funding costs
here they either shut down and do and
just shut the whole thing down and go
you know go go back to Japan which
they're not going to do or they have to
do something and they have to
rationalize that okay I'm gonna buy a
single a rated clo because I really have
to and I'm I'm gonna convince myself
there's absolutely no risk to doing so
espe take more and more and more risk
until it all blows up I mean right and
and it becomes self-reinforcing right
because as more of these Japanese firms
buy this riskier debt the price of the
riskier debt goes down and what do we
all interpret that as oh yeah oh the
market thinks there's no risk because
the spreads are compressing so let's buy
some it's even better now that the
market thinks there's no risk I'm going
to jump on it at a higher price so now
I'm buying more risk at a higher price
getting lower return convinced that
there's nothing that could possibly go
wrong with us because the market is
telling me that when spread's narrowing
everything is absolutely perfect and as
long as I stay away from commercial real
estate I'll just be perfectly fine yeah
that's a great point on the spreads what
take of what type of systemic risk do
you see out there for the Japanese Banks
and then bleeding over to the banks to
the maybe the global dealer Banks or uh
the banks in the euro dollar system as a
result of the Yen let's just say it does
go to 200 over the next call it six
months six months you might be you might
be being kind
there buy Six mons
weeks yeah I the the RIS of the banks is
is really I mean their spreads are the
biggest thing that they're talking about
funding costs that's really where
they're focused the end is sort of a
symptom of all these negative risks that
are piling up I mean if you if you're a
dollar proprietor looking at Japan
you're thinking Japanese banks are doing
this the Japanese economy is horrible
already it's in recession the bank of
Japan is absolutely convinced it needs
to hike rates anyway which is sort of a
self-reinforcing doom Loop because now
the the bank of Japan feels like it
has to raise rates because they think
inflation is going to be a big deal and
actually cost pressures do build up
because the yen is going lower so they H
they have to hike rates because the
end's going lower which prices rip
higher yeah and the jgb market starts to
sell off which means that Japanese firms
don't want jgb assets because there's
price risk associated with that so the
more they want to get US dollar assets
which leads to weaker Yen and it just
gets the self-reinforcing spiral on top
of everything you've got the global e
global economy especially the economy in
North Asia Korea China and all those
areas it gets increasingly weak and it
just becomes you know the the Yen
continues to want to go lower for a
variety of reason and none of them are
good at the same time that Japanese
Banks and the bank of Japan are all
assuming basically the wrong things
about the way things are going and it
just every single one of those factors
reinforces the next one which reinforces
the next one and again reinforces the
next one that's why you've seen the
Japanese Yen break with for example
interest rate differentials this year
the yen is weakened way past any
differential because jgb yields are
selling off that much because Japanese
firms don't want to be in the jgb market
if there's price risk and it's the more
Japanese sell in the jgb market be
actually becomes price risk and so it's
just everything that everything that's
uh it gets locked into this process that
there's really no way to get out of it
and if those Clos are denominated in
dollars then is it am I correct to
assume that if the Yen goes to 200
that's their collateral source so their
collateral source is losing value it
depends on how they're funded because if
they're if we're talking strictly about
their New York branches then they're
insulated to a degree on Exchange value
risk that's one of the reasons you set
up a New York brand so that you can be
insulated from exchange risk and so
you're really focused on funding costs
and where the exchange value comes in is
when you're talking about repatriating
uh profits from your from your financial
activities in New York um so I mean it
could weaken the collateral the primary
risk to the Japanese firms who are
reaching for yield in the clo Market is
a US recession us goes into recession
and then all of a sudden the C Market's
not the only problem we're not just
getting losses in CR Clos now we're
getting losses in some of the regular
corporate structures too and it doesn't
even you don't even need losses you just
need to have a little bit of a price
change or when we're talking about Clos
all you actually really need is a tiny
tick up and correlation which I think
we're already getting the sense of that
because correlation is the biggest
factor in pricing securitized structures
especially at the top upper ends of the
of the spectrum so a little bit of a
correlation with recession risk and
suddenly those those look like um they
don't look safe anymore right that's
when everyone sells and and then
everyone's running for the emergency
exit at the same time and there's nobody
left to buy because even if you do want
to buy you're smart enough to realize if
everybody's selling I just sit around
and wait for prices to plummet and I'll
pick up uh tons of Bargains yeah yeah
wow all right man well thanks for coming
on on such short notice this is
definitely a story that we're going to
have to follow Jeff where can people
find out more about what you do do euro
dollar University that's you know
YouTube our websites Euro dollar.
University social media all that stuff
all right buddy thanks for coming on
we'll talk to you soon sure George
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