ETF Carry Trade Could Get Carried Away
August 13th at 4:35pm by Tom Lydon
Exchange traded fund (ETF) investors that have been big on the yen carry trade could see their strategy disappear soon.
Carry trade refers to the investment strategy where investors borrow money with a low interest rate (such as the yen) convert the borrowed money into a different currency (such as the dollar), and invest it into a higher yielding bond. The difference in yield represents your gain, John Hughes and Scott Maragioglio for TheStreet.com explain. Investors can access the yen through the CurrencyShares Japanese Yen Trust (FXY).
Subprime concerns and credit crunching has weakened the U.S. bond market. If the Fed were to cut interest rates and U.S. bond yields were to decline, this could cause the yen to rise relative to the dollar. The result is the unraveling of the carry trade. Already the yen has started to increase since the subprime woes received heavy attention in July, as the chart of FXY shows.
Read the disclosure, as Tom Lydon is a board member of Rydex Investments.
