How a popular trade collapsed — and why it matters

Summary

このビデオスクリプトでは、最近の市場変動の中で注目される円キャリートレードについて分析しています。キャリートレードは、金利が低い通貨で借入し、金利が高い通貨に投資する戦略ですが、最近は日本銀行の金利上昇と米国経済の懸念により、その利差が狭まり、市場への影響が大きくなったと語られています。ゲストは、このトレンドがどのように市場に影響を与え、今後の動向について議論しています。

Takeaways

• 📈 キャリートレードは、金利が低い通貨で借入し、金利が高い通貨に投資する戦略です。
• 🌐 円キャリートレードが世界的に注目されるようになった理由は、市場の変動性と投資家への影響です。
• 💡 キャリートレードが崩壊する要因は、日本銀行の金利上昇と米国経済活動の懸念による金利差の縮小です。
• 📉 市場におけるキャリートレードの崩壊は、非常に短期間で急速に進み、市場への影響が大きかったことを示しています。
• 🔍 2023年に急成長したキャリートレードは、多角的な戦略の中で最高のsharpe比のトレードの一つでした。
• 🏦 銀行やヘッジファンド、CTAなど、さまざまな投資家がキャリートレードに関与していることが明らかです。
• 📊 2023年初頭には、マクロ経済の見方とインフレの展望に基づいて、キャリートレードのポジションが急増しました。
• 📈 キャリートレードの利益は、金利差の利得に加えて、為替レートの変動による利益も含まれます。
• 🌪️ 市場の変動性と関連性により、キャリートレードの崩壊は他の市場にも影響を及ぼした可能性があります。
• 🗓️ 米国の経済成長の見方や日本銀行の金利方針の変更は、キャリートレードの再評価に影響を与える要因です。
• 🌐 キャリートレードは、特定の通貨に限定されるわけではなく、金利差が存在する限り市場には残ります。

Q & A

円キャリートレードとはどのような戦略ですか？

円キャリートレードは、低金利通貨である円を借りて、高金利通貨に投資する戦略です。金利差のスプレッドを利用して利益を得ることができます。

円キャリートレードが崩れた理由は何ですか？

円キャリートレードが崩れた理由は、日本銀行が金利を上げる動きがあり、アメリカの経済活動に対する懸念が高まったことです。これにより、円とドルの金利差が狭まり、円の評価が引き起こされました。

キャリートレードがグローバル市場に与える影響とは？

キャリートレードが崩れると、関連する為替や投資ポートフォリオに大きな影響を及ぼし、市場の不安定化を招くことがあります。

2023年のキャリートレードの特徴は何でしたか？

2023年には、キャリートレードが特に人気があり、その戦略を採用する資金が多かったため、市場において非常に集約化されていました。

キャリートレードのリスク管理モデルとしてVARとは何を意味しますか？

VARとは、Value at Riskの略で、多くのファンドがポートフォリオの最大引き下げを管理するために使用するリスク管理モデルです。

キャリートレードの解体が株式市場の不安定化にどのように影響していますか？

キャリートレードの解体は、関連するポートフォリオの他の部分にも影響を及ぼし、株式市場を含む他の市場において広範な影響を及ぼしている可能性があります。

2023年のキャリートレードにおける日本円の役割とは何でしたか？

2023年のキャリートレードでは、日本円が低金利通貨として借り入れの主要な通貨として機能しており、投資家はそれを利用して高金利通貨に投資していました。

キャリートレードの解体が示す市場の脆弱性とは何ですか？

キャリートレードの解体は、市場が共通の通貨で資金調達し、類似したトレードに集中している場合の市場の脆弱性を示しています。これは、リスク管理の限界に達する速さを増加させる可能性があります。

キャリートレードが再び興味を集めることが可能な条件は何ですか？

キャリートレードが再び注目されるためには、米国やその他の国におけるマクロ経済状況の変化、特に金利の相対的な位置づけが重要です。また、市場の不安定性や円の実現されたボラティリティが低下することが必要です。

キャリートレードの未来的な展望はどうですか？

キャリートレードは低金利通貨と高金利通貨の間で資金を移動させる基本的な戦略であり、市場に常に存在するでしょう。しかし、特定の通貨に関連するキャリートレードの人気は、マクロ経済状況や市場の構造によって変わる可能性があります。

このキャリートレードの解体は、他の市場にどのような連鎖的な影響を及ぼしましたか？

キャリートレードの解体は、特に多角的な運用資金が関与していた場合、他の市場においてリスクを削減する必要性を引き起こし、関連市場に波及効果を及ぼす可能性があります。

キャリートレードの解体が示すリスク管理の課題とは何ですか？

キャリートレードの解体は、リスク管理においてVARショックに対処するための迅速な対応が求められることを示しており、また、市場の関連性が高い状況下でリスクを管理することの重要性を強調しています。

キャリートレードの解体が示す市場構造の変化とは何ですか？

キャリートレードの解体は、市場構造が集中化され、特定の通貨や市場に関連するリスクが集約化される傾向があることを示しており、これにより市場の不安定性が高まることがあります。

キャリートレードの解体が示す投資戦略の将来性とは何ですか？

キャリートレードの解体は、特定の戦略が過度に集約化されると市場の不安定性につながることを示しており、投資家は多様なリスクとリターンのバランスを考慮する必要があることを指摘しています。

Outlines

00:00

📉 円キャリートレードの瓦解と市場への影響

市場の不安定化の中で、投資家たちが注目する円キャリートレードについて語る。円キャリートレードとは、低金利の円を借りて高金利通貨に投資する戦略であり、金利差益を得るだけでなく、為替レートの変動からも利益を得られる。しかし、日本銀行の金利引き上げと米国経済の懸念により、この戦略が崩れた経緯と、それがグローバル市場に与える影響について分析している。

05:03

📈 キャリートレードの歴史的背景と市場での存在感

キャリートレードが市場に登場してからどのように発展してきたかを振り返り、特に2016年以降のトレンドについて解説している。日本がマイナス金利政策を導入したことで、円がより魅力的な資金供給源となり、2023年にその戦略の使用が高まった理由を探っている。また、レマンショック後の市場動向と比較して、現在の状況を分析している。

10:05

🚀 キャリートレードの急激な解体と市場への影響

円キャリートレードが崩れた背景には、日本銀行の金利引き上げと米国経済の減速懸念が重なり、金利差益の縮小が起因であると説明している。その結果、円の評価と関連する為替レートの変動が市場に大きな影響を与え、特に多角的な運用が行われたファンドに影響を及ぼしたと指摘している。

15:06

📉 市場の不安定化とキャリートレードの関連性

キャリートレードの解体が株式市場の不安定化に寄与したが、全てがキャリートレードによる影響ではなく、その他の経済的要因も影響していると分析している。キャリートレードの資金供給源としての円の変動が、関連市場に波及効果を生じさせたが、広範な市場動向には他要因も関与していると述べている。

20:06

🔍 キャリートレードの未来と市場構造の脆弱性

キャリートレードが崩れた後の市場構造と、その脆弱性についての考察を提供している。市場における資金供給源としての円の役割が変化し、関連する投資ポートフォリオのリスク管理モデルが影響を受けたと分析している。また、市場が共有リスクを持つ構造が、不安定な状況に陥った原因であると指摘している。

🌐 キャリートレードの持続可能性と市場への期待

キャリートレードが崩れた後も、低金利通貨と高金利通貨の間には引き続きキャリートレードの可能性があると前向きに見ている。米国や日本を含むマクロ経済状況の進展に応じて、キャリートレードの関心が再び高まる可能性があると述べている。しかし、市場の不確実性や為替レートの変動が、その再参加を難しくしている現状を指摘している。

Keywords

💡円キャリートレード

円キャリートレードは、低金利の通貨である円を借りて高金利通貨に投資する戦略です。ビデオでは、これが世界市場における大きな焦点であり、近年の市場変動の中で特に注目されています。ビデオでは、円キャリートレードがどのように崩れたか、またそれがグローバル市場に与える影響について議論されています。

💡キャリートレード

キャリートレードは、金利差を生み出す為に低金利通貨を借りて高金利通貨に投資する投資戦略です。ビデオでは、キャリートレードがどのように機能し、なぜ近年人気のある戦略となってきたのかが説明されています。

💡金利差

金利差は、異なる通貨に対して設定されている金利の差を指します。ビデオでは、キャリートレードの魅力が主に金利差による利益にあります。例えば、日本では長期に亘ってゼロ金利に留まっており、一方で米国ではインフレーションの影響で金利が上がったため、大きな金利差が生じました。

💡インフレ

インフレは、物価の総じゅうりが上がることを指しており、ビデオでは米国のインフレが増加し、その後のインフレの冷却がUSの金利の下落につながったと説明されています。インフレは、経済全体に影響を与える重要な経済指標であり、キャリートレードの成功に重要な役割を果たします。

💡リスク管理

リスク管理は、投資ポートフォリオの最大引き下げを管理するためのモデルであり、ビデオではVAR（Value at Risk）というリスク管理モデルが使用されています。円の変動が多角的な影響を及ぼし、リスク管理のためにポジションの解消が行われると説明されています。

💡ポジション解消

ポジション解消は、市場の変動に対するリスク管理の一環として行われます。ビデオでは、円の変動が急速なポジション解消を引き起こし、市場の不安定さを増しました。特に、多角的な投資ポートフォリオを持つファンドでは、ポジション解消は連鎖反応を引き起こすことが示されています。

💡インストitutional money

インストitutional moneyは、日本国内の保険会社や投資信託などの金融機関が外国債券や外国株式に投資する資金を指します。ビデオでは、これらの資金がキャリートレードに関与し、市場の流れに大きな影響を与えると説明されています。

💡ヘッジ比率

ヘッジ比率は、外国為替リスクを管理するために使用されるヘッジされたポジションの割合を指します。ビデオでは、日本からの外国資産への投資が増加し、ヘッジ比率が低下したことが示されています。これは、キャリートレードのリスクに直接的関与を示しています。

💡市場の不安定性

市場の不安定性は、価格の変動や投資の信頼性の低下を意味します。ビデオでは、キャリートレードの解消が市場の不安定性に寄与し、特に株式市場においては大きな影響を及ぼしたと議論されています。

💡市場構造

市場構造は、市場の機能や投資戦略の流れを定義する要因のセットを指します。ビデオでは、市場構造の変化がキャリートレードの解消に寄与し、市場の脆弱性につながったと説明されています。

💡リスク溢酬

リスク溢酬は、リスクを引き受ける対価として得られる利益の割合を指します。ビデオでは、リスク溢酬がキャリートレードの魅力の一部であり、市場の不安定性が高い時には再参加が難しくなると議論されています。

Highlights

日元利差交易成为投资者关注的焦点。

利差交易策略简介：借低利率货币投资高利率货币以赚取利差。

日元长期低利率使其成为利差交易中的典型低收益货币。

2023年，由于多种宏观因素，日元利差交易策略表现突出。

市场参与者包括对冲基金、CTA和日本机构投资者。

日元利差交易的解除与日本央行的意外加息和美国经济活动担忧有关。

市场对美国经济衰退的担忧导致美债收益率下降。

日元利差交易解除导致市场波动性增加。

VAR冲击导致跨多个投资组合的连锁反应。

日元利差交易的解除对全球宏观基金和小型基金产生压力。

市场结构的脆弱性与日元利差交易的解除有关。

日元利差交易的解除不意味着利差交易策略的终结。

利差交易的未来取决于宏观经济条件和市场波动性。

市场对于日元利差交易的重新参与将取决于市场波动性的降低。

美国经济的展望和全球市场的动态将是影响利差交易的关键因素。

市场结构的内生性和集中性可能导致了市场的脆弱性。

Transcripts

Amid the recent market volatility I'm 

suddenly hearing a lot about  something I honestly haven't 

spent much time on, the yen  carry trade, which now seems 

to be one of the biggest focal  points for investors. So what 

is the yen carry trade? Why  did it break down? And what 

does it all mean for global  markets? I'm Allison Nathan 

and this is Goldman Sachs Exchanges. Today, I'm speaking to Kamakshya  

Trivedi; the head of Global Foreign Exchange,  

Interest Rates, and Emerging Market Strategy Research;  

and to Praneet Shah, who is co- head of Global G10 FX  

Options Trading in our Global Banking and Markets division. Kamakshya, Praneet, 

thanks so much for being here today. 2 

Kamakshya Trivedi: Thanks for having us, Allison. Praneet Shah: Yes, thank you, Allison. 

Allison Nathan: Kamakshya,  let's just start on a very basic 

level. What are carry trades?  How do they work? Or at 

least how are they supposed to work? Kamakshya Trivedi: Yeah,  

so at a very simple level, a carry trade is a strategy or  

an investment strategy where an investor borrows in a  

currency where interest rates are low and invests in a currency  

where interest rates -- or what is often called in the  

jargon "carry" -- the carry or interest rates are higher. And  

so essentially, that strategy allows them to earn the spread  

between the low interest rate currency where they  

borrowed and the high interest rate currency where they're investing. 

And typically, the kicker in  these types of trades comes 

from the fact that, in addition  to the interest rate spread, if 

the currencies actually move  -- so the currency with the 

low interest rate depreciates  against the currency with the 

high interest rates -- the  investor earns not just the carry, 

or the interest rate spread,  but also they benefit from the 

3 relative currency move. 

So in the context of what  we are discussing today, a 

common example of the carry  trade was the yen was a very 

low yielding currency with  interest rates that had been 

pinned at zero for many years.  Whereas, in comparison to 

that, the US dollar, or US  interest rates, which went up 

quite meaningfully after the  pandemic surge in inflation, 

and so you had nearly a five  percentage point gap between 

interest rates in Japan, or  what you could borrow on the 

yen, versus what you could  earn by investing in assets in 

bonds in the US. And if you took an even  

more higher yielding version of that trade, if you invested in emerging  

markets, another common version of this,  

which was borrowing in Japan, or in yen, and then investing  

in Mexico, that spread was nearly 9-10%. So that's the kind  

of carry trade that we're talking about. 

Allison Nathan: Okay, got it.  So Praneet, from your seat, 

you see actual flows into  these trades, so how long have 

they been a feature of the  market? And who's really 

trading these positions? And how has that evolved recently? 

4 Praneet Shah: These trades  

have really been a feature of the market for a long time now. You last saw a 

proliferation in these trades  back around the Lehman crisis 

around '09 where you also  saw the subsequent unwind in 

the years after. I think the  second wave of yen carry trades 

really have been in existence  since 2016. This is when the 

Japanese employed negative  interest rates, so it became an 

even more attractive funder  relative to the rest of the world. 

So they've been around for  a long time, but you've only 

really seen a heightened  use of this strategy in 2023 

because it was one of the best  sharp ratio trades that you 

could employ across multiple  strategies, FX carry. And you 

went into the start of this  year where the macro narrative 

was this immaculate disinflation,  so this is inflation cooling 

off within a very benign growth  backdrop. So a lot of our 

hedge fund franchise, CTAsin  particular, were funding in 

yen. You also saw real money  look to fund loans in the 

likes of Mexico that yield  you 10%, borrowing in Japan at 

zero. So at the start of this year,  

you really did see a real increase in positioning,  

and you got to real extremes in July, just at the start of the  

summer. When you look at our positioning metrics,  

they all indicated record yen 5 

shorts, so it gives you a real  indication as to how large 

these positions really had  built. And this took pretty much 

six months to build over the  start of the year, and they 

continued to be added to in  what was supposed to be a 

quiet summer and it was  supposed to be a market in which 

you'd hoped to earn carry and  where vol would realize low 

over the summer months. Allison Nathan: And then  

there is this institutional side, which is more entrenched, correct? 

Praneet Shah: Yeah, so if you  have one side of a franchise 

that is the more speculative  flow, which is the hedge funds 

and CTAs I mentioned, these are the pension funds, investment trusts,  

that all manage money in Japan that can't find the rate of return at home,  

so they end up buying treasuries, call it at 5%. 

Now, the cost of currency hedging  these is very prohibitive, 

so what's essentially ended  up happening is they've just 

bought these foreign assets,  currency unhedged. And as a 

result, they basically end up  in an open FX position, and 

this in essence is a carry trade. So if you look at our data, we'd say  

historically these hedge 6 

ratios, about 60% of  investments have been currency 

hedged. Right now, they're at  multiyear lows, around 45%. 

And it goes to show the levels  of conviction even from this 

institutional money in Japan  to continue to buy foreign 

assets through the course of  this year. And it really started 

back in 2022 when Japan  really got left behind in the 

global hiking cycle. Allison Nathan: So  

Kamakshya, we now understand what the carry trade is, we understand  

how popular of a trade it had become, so what drove  

the unwind of this trade in what seems to be a very short  

period of time in recent weeks? 

Kamakshya Trivedi: Yeah, so I  think that if you go back to 

what we were discussing, both  sides of the equation have 

started to shift, which is  there were reasons for rates to 

start going up in Japan and  there have been concerns 

around US economic activity, concerns around US recession risks that have caused US rates to start 

gradually coming down as  inflation has cooled. So if you 

go back to what we were talking  at the top, which is the 

attractiveness of these kinds  of carry trades, is really the 

interest rate differential or  the spread that you can earn 

and then the currency kicker. 7 

What's really happened over  the past few weeks is that 

spread has started to narrow.  It's started to narrow, on the 

one hand, because the Bank  of Japan has finally, after 

many years of being pinned  at zero or below, started to 

move rates higher and there  was somewhat of a surprising 

interest rate hike that we  saw from the Bank of Japan in 

July that was not completely  well anticipated by the market 

but currently forecasted by  our economists. And on the 

other hand, you've got a  series of somewhat weak US data 

points, most particular amongst  that an employment report 

that came after some weak  inflation readings, and so the 

market started to worry about  it and price in the possibility 

of weaker US economic activity  and, more particularly, 

rapid cuts by the Federal Reserve. And so we saw from both sides  

of this that interest rate differentials start to shrink  

and the yen start to appreciate relative to the dollar. And then  

part of these moves are very volatile because,  

as Praneet said, people were very engaged in those trades or these  

trades were very crowded in opposite directions.  

That's the, I would say, the economic cause for why we saw some of these moves 

starting to unwind. 8 

I think it's also fair to  say that we saw some other 

coincidental news, whether it  was on micro earnings, etc., 

that sort of caused volatility  at the same time as well. 

Allison Nathan: And Praneet,  when you think about how 

crowded these trades were  and you think about how big 

the moves were, how did that  play into how all of this 

unraveled? Praneet Shah: Yeah,  

I think obviously, like you said 

before, that we saw record yen  shorts just prior to the start 

of this move. If you actually  drill down into our positioning 

data, we actually saw the  largest change in monthly 

positioning since we started  taking records. So it gives you 

an idea of the wholesale  liquidations of positions that 

you've seen, especially on the  speculative side of our flows 

over the past few weeks. We  basically saw record shorts in 

yen, and now they're pretty  much pared all the way back 

down to flat. Allison Nathan: So Praneet,  

Kamakshya just talked about the catalyst behind some  

of the unwind here, but, when you think about the positioning  

that you look at every day and the types of funds  

that are owning these, how did that contribute to just the speed of the  

unraveling that we saw? 9 

Praneet Shah: Yeah, I think, look, when you saw a drawdown first start with an initial appreciation  

in yen, it caused quite  

a VAR shock across multiple portfolios. So VAR, meaning value at risk, is pretty much a risk 

management model that a lot  of funds employ to manage 

max drawdowns. So when you're seeing a drawdown in one aspect of your portfolio,  

it has a ripple effect across the rest of your line items. So purely  

due to risk management purposes, if you're seeing  

a drawdown in what was a pretty much concentrated trade held across  

multiple funds, you see this ripple  

effect that I've just spoken about whereby you're forced to pare down risk across all  

your other line items. 

So it almost has a self-reinforcing  effect. When you've got 

yen as the funder for other  procyclical long risk trades and 

you're seeing this unwound, you have this negative feedback loop. So not only did we start  

to see other assets start to move such as  

equity positions, even dispersion trades that aren't even really  

related to the yen carry trade, per se, it had a pretty wide spread  

impact across other markets, and I'd say  

largely due to this position purge that you saw and a VAR shock essentially that ended up 

resulting in positions needing  to be pared down across the 

10 board. 

Allison Nathan: So essentially,  even if you have conviction 

in a trade that's unrelated,  you may actually have to 

unwind that position because  of the VAR implications of 

the big moves in the yen carry trade, for example? Praneet Shah: Yes, that's totally right. 

Allison Nathan: And this is  not just huge global macro 

funds that have these positions.  There were smaller funds, 

too, right? So wouldn't they  feel the pressure maybe more 

quickly when we think about  these types of moves and how 

big they've been? Praneet Shah: Yeah,  

when you look at that aspect of the flow that we saw, when you have  

especially these multi- manager funds where you  

have lots of smaller allocations of risk all managing the same trade,  

you end up having to pay your risk down a  

lot quicker than some of the more single-manager funds that were much  

higher tolerance for a drawdown. So it's  

almost a cascading effect whereby you've got lots of smaller pools of  

capital now all drawing down at the same time.  

You end up hitting risk limits a lot quicker than you historically otherwise  

would have outside 11 

of this type of a market structure. Allison Nathan: So Praneet,  

the million dollar question is: How far are we into this unwind? 

Praneet Shah: I think it's  important to I think break down 

the flows into two separate  sets. So if you start with our 

more speculative flow -- and  that's flow that tends to be 

much higher frequency, faster  moving -- that slower hedge 

fund, CTA, that element of it  that's caused a marginal move 

over the last few weeks. So  our positioning data tends to 

capture this aspect of the flow  a lot better, and you can see 

these record yen shorts have  pretty much been pared all 

the way back down to flat. So in terms of positioning  

from this element of our franchise, it really  

does look as though the worst may be over. However, again, like you said,  

the multi trillion yen question actually could be:  

What's actually happening with institutional money in  

Japan? This is the flow that's really been entrenched over  

the last few years since 2016. It's proliferated since 2022.  

Here, you've got two sets of flow. One is Japanese retail.  

This again tends to be slightly faster moving.  

It's very likely that they will have hit margin calls on the way down in dollar yen and  

cross yen. 12 

So I'd estimate that this is  pretty much mostly cleaned up. 

However, institutional investors  in Japan, I think this is 

the one that's much more  difficult to gauge. Here, we've 

seen various estimates of how  much holdings they've got. 

So they've actually got, call  it, two trillion US dollars of 

foreign bond holdings in total, this community. We estimate that, especially the  

pension fund industry that only really currency hedged 45%  

at the moment, if you look at the equity side now,  

we estimate that they have about another trillion US dollars of  

equity holdings that could be susceptible to an FX move  

as well. So these are pretty sizable numbers, but we don't  

really have that firm a handle on how much of  

this part of the portfolio that potentially needs to be unwound. 

Again, this flow is a lot  stickier. It's a lot slower moving. 

Years of entrenched positioning  don't just get washed away 

in a few weeks. So yeah, look,  I don't think this part of the 

unwind is still over. I think  there's a lot of flows that could 

yet to become, and it mostly  will be propagated by further 

strengthening in yen. But  again, this negative feedback 

loop really is still there at the  forefront of what the market's 

thinking about. 13 

Allison Nathan: Are there other reasons why the positioning might remain sticky in  

these institutions even if the trade moves against itself? 

Praneet Shah: Yeah, I think  you can approach this in two 

ways. So one, right now, like  I said, hedge ratios look like 

they're at 45%. They've  typically been closer to 60%. But 

on the margin, if anything,  if you see these moves in yen, 

you're likely to do one of two  things. You either increase 

the hedge ratio, or you start  to pare down holdings of 

foreign assets. In both those  instances, it involves every 

patriation back into yen. However, if you put aside  

this need to rebalance your hedge ratio and you just look at the  

bigger picture here, I can easily see a scenario  

in which let's say the US manages to avoid a recession. Then you're back in this benign 

disinflation narrative again.  The yen suddenly starts to 

stabilize. And let's face it,  

I know the BoJ hiked rates 15 basis points, but the rounding error  

is still close to zero. The US still has 5% rates. The Mexican  

peso still has 10% rates. You still have an attractive  

yield differential here. And if the US were to avoid a recession,  

there wouldn't be any real 14 

underlying reason to start  a massive reallocation away 

from foreign assets. So, yeah,  I think that's pretty much 

the thing we'd be looking at.  The US recession fears I think 

would be the driver. Allison Nathan:  

Kamakshya, if we think about the broader context, there's the narrative that the  

extreme volatility in equity markets ties  

back to the unwind of these carry trades. True? Or is that overblown? 

Kamakshya Trivedi: So the  yen carry trade even in the 

past week I think has been  blamed for a lot of this market 

volatility that we've seen.  That's been the case of some of 

the big drawdowns we've seen  across equity markets to 

spark volatility. I think some  of that is reasonable. I think 

carry strategies in some  way, shape, or form have been 

pretty ubiquitous across  global asset managers of macro 

funds. So whether that is  funded out of the yen, funded 

out of the Chinese renminbi,  I think people have had some 

of these types of FX carry  strategies in portfolios. As those 

have come under pressure,  that's naturally going to have a 

knock-on effect on other parts  of their portfolio. So I think 

that part of it is reasonable. What I think is a little bit of an  

overstretch or an overclaim 15 

is that all of the volatility,  especially the volatility that we 

saw on Monday, has to do with the yen carry trade. Japanese stocks were probably the biggest movers  

on that day. They  

dropped by more than 10%. The yen carry trade was not one where people were borrowing in yen and 

buying Japanese stock. They  were buying overseas assets. 

So some of this is just that  you also have had, at the same 

time, some disappointing  earnings, some questioning of the 

broader artificial intelligence  theme, and just generally 

some frothy, over-positioned  equity markets going into the 

summer where you had some bad data and concern around US recession picking up. 

So my view is that, yes,  there's been some spillovers 

elsewhere, whether it is in the weakening in Latin 

American currencies, which  were on the other side of those 

carry trades; whether it's the  kind of strengthening in CNY, 

which was used as a funder  in sympathy with the yen; but 

I think some of the broader  market volatility, specifically in 

equity markets, I think is  also just a function of the 

coincidental timing of how  some of the news flow has 

evolved on the macro and the micro side. Allison Nathan: So just some bad  

luck here with all this coming together at one time? 

16 Kamakshya Trivedi: Yes, a little  

bit of bad luck, but it's often the case that,  

when you have markets at a high level, when you have particular trades that  

are very highly crowded and  

concentrated, it doesn't take very much to move things the other way. There were some genuine 

fundamental reasons for some  degree of unwind in the yen 

carry trades specifically  that we talked about, some 

genuine fundamental shifts  in the macroeconomic picture 

in Japan and the US. But I  think some of the broader 

volatility does feel to me like  some few different things came 

together in a sort of perfect storm. Allison Nathan: And Praneet,  

what should we take away from that if we think about  

the broader market structure in terms of has it gotten too  

brittle? Has it gotten too interdependent in a way that  

we can see these very vicious bouts of volatility? 

Praneet Shah: I think what's  interesting about this risk 

episode in particular is the way  it's all unraveled. So if you 

take the last risk shock,  which was 2020, COVID was a 

pretty exogenous event. You  saw this big shock, people re- 

rated down their growth  expectations, the yen started to 

appreciate. This was all  correlated together. Stocks traded 

17 lower,  

yen took a safe haven bid. But I think in this episode, it's very interesting  

to note the degree of endogeneity you've seen here. You saw this initial 

appreciation in the yen after  the authorities intervened. 

And I think it's this negative  feedback loop that I think has 

caused the brittleness in this case. So you've seen a whole host  

of investments funded out of yen. The price of these investments  

are going to start to trade lower,  

which in turn causes a further need to unwind. So here you've actually got this negative 

circularity, which actually  may not have been apparent in 

the previous risk shock such  as COVID. So I think this 

one's a bit more unique in  that people had actually funded 

in a specific currency like  the yen. But positioning really 

did get to euphoric levels  at the start of July, which 

obviously hasn't helped. Kamakshya makes a good  

point in that a lot of it may well be correlation and not causation,  

and there's a lot of factors that all lined  

up at the same time. But I think it's this endogeneity aspect of this risk  

shock that has had a much bigger ripple  

effect relative to what you've had in previous instances such as COVID that  

have been a bit more exogenous. 

18 Allison Nathan: But is that  

endogeneity just a feature of the market at this point? 

Praneet Shah: I think it's  a feature of the market that 

funds itself in a common  currency and holds pretty much 

concentrated risk across a  similar set of trades. And I 

think it's this feature of  the market that really induces 

brittleness in the market.  Where you do have a sharing of 

positions all concentrated,  especially in a setup such as the 

multi-manager one which you  just discussed, where you've 

got a big pool of capital that  used to be managed in a more 

concentrated way suddenly  managed across lots of smaller 

pools of capital, each with  tighter risk limits, you end up 

with this cascading effect  again whereby a VAR shock in 

one element of the portfolio  ends up actually having a 

much more amplified effect  elsewhere purely because these 

positions are all correlated  to a much bigger degree than we 

all expected them to be. Allison Nathan: Kamakshya,  

any lessons you take away from this recent episode? 

Kamakshya Trivedi: Yeah, I  think I would echo some of 

the things that Praneet said.  I think it's the fact that you 

19 had quite a crowded  

position, one that has built up over many years, and perhaps some degree  

of complacency that the macro outlook that  

underlined that position that the US would continue to be exceptional  

and strong and that Japan would struggle  

to raise rates and generate inflation, there was a lot of complacency around both those 

assumptions. Both of those  have come into question in 

recent weeks, and that's  caused very big reversal on the 

back of some of those changed  market micro structure 

dynamics that Praneet just described. Allison Nathan: But what I'm hearing  

from you is this may not be the end of  

the carry trade. It really just depends on how the macro conditions evolve from here and in 

particularly between the  US and some of these other 

countries with low-yielding currencies. Kamakshya Trivedi: Absolutely not.  

I think that the carry trade, as I go back to,  

is very simply it's just borrowing in a low-yielding currency and investing  

in a high-yielding currency. That is going  

to stay with us. It's been with us well before yen became the kind of  

dominant low-yielding currency. It's going to  

stay with us well after. We've already I would say within  

the past week seen some people reengage in it, move their funding  

currency or borrowing 20 

currency to the Chinese renminbi where perhaps the fundamental case for rates to remain low at  

this point is stronger than it is in  

Japan. So there will always be a lower yielding currency  

to borrow from and a higher yielding currency to invest in. That  

carry trade is going to be very much with us. 

This particular one has got  long in the tooth, got perhaps a 

bit too crowded and saw some  justifiable reason to have 

some unwind. But it's  definitely not the end of carry 

trades. Allison Nathan: As  

we've discussed and Kamakshya just said, carry trade not over,  

but when could we see the interest in it rise again? 

Praneet Shah: I mentioned at  the start that 2023 FX carry 

was one of the best performing  short ratio strategies out 

there. And I think an important  part of the equation is the 

realized VOL of the return.  So Kamakshya mentioned that 

you still have this potential  return, invest in the US at 5%, 

borrowing Japan at 0%. But a  key input is how volatile is 

that return likely to be? So right now, we've seen a huge spike  

in implied volatility 21 

in dollar yen because of how  nervous the market is, how 

volatile it's been, and it's very  difficult to reengage in carry 

strategies when realize and  implied VOL is so elevated. So 

again, given that yen has  been the epicenter of all the 

moves you've seen recently, it's  very difficult to see people 

really reengaging in procyclical  long-risk trades just yet 

whilst dollar yen vol remains elevated. So you can look at the term structure  

to see what's priced. I see dollar yen returning  

to a bit more of a normal market regime not only until mid-November  

time. This is post the US election, so that's  

still some weeks or even months away before you really see a  

normalization. So we could be waiting a long time I think  

if this elevated period of uncertainty continues to remain  

before people really look to reengage. 

Allison Nathan: And longer  if the US economy disappoints 

and we end up in recession and  the macro conditions shift. 

Praneet Shah: Oh, it's very  conditional on the US growth 

outlook. We've got payrolls  coming up in September, just 

before an all-important FOMC  meeting. There's a whole 

host of macro variables that  you really need to be keeping 

an eye on. So yeah, there's  two parts here. There's, one, 

22 the outlook  

for the US and global economy. But two, how much of a risk premia we continue to place  

in yen realized and implied vol. 

Allison Nathan: Kamakshya,  Praneet, thanks again for 

joining us. Praneet Shah: Thank you, Allison. 

Kamakshya Trivedi: Thanks, Allison. Allison Nathan: This episode of  

Goldman Sachs Exchanges was recorded on Monday,  

August 12th, 2024. I'm your host Allison Nathan. And if  

you want to hear more from Goldman Sachs, listen to  

The Markets. Every Friday, we break down what's going on in  

the markets and what could come next. Check it out  

on your podcast platform of choice. Thank you for listening.