Treasury Yields Are EXPLODING!! (Something BIG Is Happening)

Summary

The 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

• 📉 The Japanese Yen is experiencing a significant devaluation against the US dollar, which some describe as a crash.
• 📈 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.
• 🔍 The speaker suggests a correlation between the Yen's crash and the rise in Treasury yields, but the exact relationship is not immediately clear.
• 🤔 The speaker speculates that the Yen's movement may be causing the 10-year Treasury yield to spike, rather than the other way around.
• 🏦 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.
• 🌐 The situation has global implications, especially for Japan's economy, which is heavily reliant on importing energy priced in US dollars.
• 📊 The devaluation of the Yen could lead to increased costs for imported goods, potentially exacerbating inflationary pressures.
• 💡 The speaker highlights the difficulty in understanding market movements at this scale and the importance of seeking expert insights, such as from Jeff Snyder.
• 🗼 The Japanese Central Bank's attempts to intervene and stabilize the Yen have been met with limited success, suggesting the market forces are stronger.
• 💼 The discussion points to systemic risks for Japanese banks and potentially global financial institutions due to interconnected economies and banking systems.
• 📚 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

00:00

📉 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.

05:02

🤔 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.

10:04

🌐 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.

15:04

🔍 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.

20:06

📈 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.

25:08

⚠️ 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.

Keywords

💡Treasury market

The treasury market refers to the financial marketplace where U.S. government bonds are issued and traded. In the video, the treasury market is highlighted due to significant movements in the yields, particularly the 10-year treasury yield, which is a benchmark for interest rates and has a direct impact on the broader economy and financial markets.

💡Japanese Yen

The Japanese Yen is the official currency of Japan. The script discusses the Yen's value in relation to the U.S. dollar, noting its significant devaluation, which is a critical focus of the video. The Yen's movement is analyzed in the context of its impact on global financial markets and the potential consequences of its depreciation.

💡Yield

Yield in finance refers to the return on investment for a bond or other fixed-interest security. The 10-year treasury yield is emphasized in the script as it 'explodes to the side,' indicating a sharp increase. Yields are inversely related to bond prices, so when yields rise dramatically, it suggests a significant sell-off in the bond market.

💡Basis points

A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. In the script, an increase of 'almost eight basis points' in the 10-year treasury yield is described as a massive move, indicating a substantial shift in the market.

💡FX markets

FX stands for foreign exchange, and FX markets are where currencies are traded globally. The script mentions the FX markets in the context of the Japanese Yen's movement against the U.S. dollar, which is crucial for understanding international trade dynamics and the value of investments denominated in different currencies.

💡Central planners

Central planners refer to the policymakers or authorities who attempt to control or manage economic factors such as currency values and interest rates. The script discusses the actions of Japan's central planners in trying to stabilize the Yen's value against the dollar, which is a key narrative in understanding the video's theme of market intervention and its outcomes.

💡Hedge funds

Hedge funds are types of investment funds that aim to generate absolute returns by employing various strategies to protect against market downturns. In the script, the potential impact of the Yen's movement on hedge funds' positions is considered, illustrating the interconnectedness of global financial markets and the potential ripple effects of currency devaluation.

💡Treasuries

Treasuries, in the context of the script, refer to U.S. government bonds, which are debt securities issued by the U.S. Department of the Treasury to finance government spending. The selling of treasuries by financial institutions is discussed as a possible cause for the spike in the 10-year treasury yield.

💡Inverted yield curve

An inverted yield curve occurs when short-term interest rates are higher than long-term rates, which is often seen as a predictor of economic recession. The script mentions the inverted yield curve in the context of the Federal Reserve's rate hikes and their impact on the treasury market, highlighting the complexities of financial market dynamics.

💡Systemic risk

Systemic risk refers to the risk that the failure of one financial institution or asset class could trigger a series of events causing the collapse of other institutions or the entire financial system. The script discusses the potential for systemic risk in the context of the interconnectedness of global banks and economies, particularly in relation to the Japanese Yen's devaluation and its impact on financial markets.

💡Commercial paper

Commercial paper is a short-term unsecured promissory note issued by corporations to raise funds, typically for a period of 270 days or less. The script mentions Japanese banks' New York branches selling commercial paper as part of their diversified funding sources, which is relevant to understanding how these banks manage their funding costs and risks.

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