Markets are notorious for moving between the states of fear and greed. For a number of years, we were living within the greed state. Low corporate bond spreads…no problem. Low credit capability for mortgage borrowers…no problem. The great amounts of liquidity in the global financial markets assured that more dollars would be chasing financial assets,.
Over two months ago, we noted that it appeared the ‘carry trade’ between risky assets (represented by the S&P 500) funded by borrowings in a low interest rate currency (Japanese Yen) had seemed to unwind. In other words, Yen strengthening coupled with S&P 500 declines may mean that the ‘carry trade’ was being unwound…and with it, we would.
Or does it? Let’s listen in on a few earnings announcements for banks that discuss risk management’s role in their recent problems: Citigroup just announced a 57% drop in earnings and noted on its conference call: “We are examining our risk management organization to enhance particular areas such as convergence risk management and the management.
We’ve all heard about the ‘carry trade’ in the press. Although, it did arise in discussions more often earlier in the year than it does now. However, it may now be time to resurrect the discussions about what might be going on and the impact for US financial makets. When an investor enters the carry trade,.