Yields on Japanese bonds continue to rise. This week, 2-year and 5-year rates reached their highest levels in 31 years, while the 10-year yield is at a 30-year high. To most investors, these figures may seem insignificant. Yet they mark a major turning point for global financial markets.
For more than twenty years, a significant portion of the international financial system has been built on a simple assumption: it would always be possible to borrow yen at a negligible cost to finance higher-yielding investments around the world. Today, this assumption is gradually being called into question.
Over the past two years, the yield on the Japanese 2-year bond has risen from 0.35% to nearly 1.70%, representing a nearly fivefold increase in the cost of financing at the short end of the yield curve.
In theory, this development should have already triggered a massive unwinding of the yen carry trade. For nearly twenty years, investors have borrowed yen at a cost close…
