The Yen Carry Trade Poses Major Risks | Presented by CME Group

"The tactic is to borrow money in Japan... buy dollars... But what happens when it reverses?" To close a carry trade, an investor must do the opposite of the opening trade. They must sell the US Dollar and *buy back* the Japanese Yen to repay the loan. A mass unwind creates a feedback loop of Yen buying, driving the currency higher. LONG JPY (or Short USD/JPY) to capture the repatriation of capital. US yields could spike significantly, widening the spread again and making the carry trade attractive once more.

The speaker notes that borrowed Yen was used to "invest that money in higher yielding or higher appreciating US assets" and specifically that "money also ended up in US equities, particularly tech stocks, which help prop up the AI fueled narrative." The carry trade acted as a liquidity pump for the AI/Tech sector. As the trade becomes less profitable (narrowing spreads), investors must sell these assets to repay their Yen loans. This creates structural selling pressure on the Nasdaq and AI leaders regardless of their fundamental earnings. SHORT US Tech and AI proxies as the liquidity tide goes out. US tech earnings could be strong enough to absorb the selling pressure; the Bank of Japan could intervene to cap yields again.

Investors used the strategy to invest in "higher yielding... US assets" (referencing the yield spread between Japanese and US rates). A significant portion of the $1 trillion carry trade is parked in US Treasuries to capture the yield differential. Unwinding the trade requires selling these bonds, which drives bond prices down and US yields up. SHORT US Treasuries (or Long Yields) as foreign demand evaporates. A "flight to safety" event in global markets could drive investors back into US Treasuries despite the carry trade dynamics.