Rising Japanese bond yields could shake global carry trade, crypto

Japanese government bond yields have jumped to their highest level in decades, prompting some analysts to speculate that it could be behind the recent crypto market sell-off on Sunday. 

Japan’s ten-year government bond yield hit 1.86% on Monday, its highest level since April 2008, according to MarketWatch. 

Yields in the ten-year bonds have almost doubled in Japan over the past 12 months. Japan’s two-year bonds also hit 1% for the first time since 2008. 

While 1.86% is not a substantial yield from government bonds, it is significant because it marks a shift, as Japan has had a very low interest rate environment for decades, with negative or close to zero rates prevailing for the most part, and a very stable bond market. 

This has encouraged institutional investors around the world to borrow low-interest JPY from Japan to buy higher-yield, riskier assets, in a strategy called the “Yen Carry Trade.”

“Trillions borrowed in yen, deployed into US Treasuries, European bonds, emerging market debt, risk assets everywhere,” explained economics author Shanaka Anslem Perera, who said, “That anchor is now breaking.”

Japan’s bond yield hike is bad timing for US

Japanese institutions hold approximately $1.1 trillion in US Treasury securities, and is the largest foreign position, explained Perera. 

Related: Bitcoin crashes 5% in ‘Sunday slam’ as liquidations surge

The timing couldn’t be worse for the United States, as it comes when the Federal Reserve terminates quantitative tightening, and when the US Treasury requires record issuance to finance $1.8 trillion deficits, he stated. 

Analysts warn of a possible flight to safety ahead

This could impact the cryptocurrency market in several ways. Bitcoin (BTC) and cryptocurrencies typically thrive in an era of ultra-loose monetary policy and low interest rates globally. 

When Japan provided an abundance of cheap money through the carry trade, some of that capital flowed into riskier assets, such as crypto and US tech stocks. 

If that liquidity reverses and flows back to Japan, there will be less speculative capital available for crypto markets.

“Crypto is usually the first place where all of this shows up. It sits at the highest end of the risk spectrum, so even small shifts in liquidity lead to sharp moves,” said DeFi market analyst “Wukong.”

If global bond markets reprice violently, investors typically flee to safety first, resulting in a sell-off of all risk assets as people scramble for cash and liquidity.

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