USD/JPY headed straight towards 2xx

15 апр.Few understand this (mainly because it's nerdy as hell)

But it's a big deal.

And every investor should at least kind of get it to grasp what's really going on with their portfolio.

In simple terms: Japan has kept interest rates artificially super low for over a decade.

Even lower than the US and Europe.

That forced Japanese investors to invest overseas to seek better returns.

Over $3 Trillion found its way into overseas markets, pumping up asset prices and keeping US and EU borrowing costs artificially low as they happily deficit spent.

What were the Japanese investors buying?

Mainly US and European bonds to get better yields than they could get at home.

But since they live in Japan, they care about their returns in Yen terms - not dollar or euro terms.

So they had to hedge their foreign investments to protect themselves in the case of currency volatility.

Why?

Because if you buy a European bond and the Euro suddenly crashes vs the Yen, you could end up losing in Yen terms.

So you buy some insurance for that scenario and pay a premium to protect against that risk.

That works fine until Yen volatility increases.

Which is exactly what is happening now:

As currency volatility increases, the insurance to protect against it gets more expensive.

The insurance starts to eat into the returns you could get by holding US and EU bonds.

So what do you do?

You sell the foreign bonds when they no longer earn you more than holding a Japanese bond.

And if the Japanese bond yields are rising, then that also increases their relative attractiveness.

Which is ALSO happening now, and needs to happen even more to protect the Yen from devaluing too much.

Japanese bond yields are surging towards decade+ highs as I type this:

This is why people care about the Yen and Japanese government bonds.

When Yen volatility rises and Japanese government bond yields rise, investment capital flows out of US and EU bonds and back into Japan.

When investment capital flows out of US and EU bonds, then US and EU bond yields rise.

When those yields rise, highly indebted governments (like the US) start to look even more insolvent than they already look.

Why?

Because higher yields mean higher interest payments on the debt in the near future.

And considering the US is already deficit spending trillions of dollars, those interest payments can only be paid with more borrowed money.

Borrowing more money increases the bond supply, which sends yields even higher.

Which increases the interest payments further, and increases the need for the government to borrow.

Starting to make sense? It's a vicious feedback loop.

*This is not financial advice