Choppy Monday – A Pause to Refresh?

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Japan Bond Yields vs Yen Carry Trade Explained

• The chart below shows a strong growth in the Japanese long bonds over the last 5+ years, reaching the highest yield in at least 25 years.

• Pundits are saying that rising bond yields will derail financial markets.

• How does the Yen Carry Trade Work?

• The Yen Carry Trade = borrow cheap ¥ in Japan (near-zero rates) → convert to USD/other currencies → buy higher-yielding assets (US stocks, crypto, EM bonds, etc.). What happens when Japanese bond yields rise (e.g., 10-year JGB yield ↑ from 0.9% → 1.5%+):

1. Higher funding cost → borrowing ¥ becomes more expensive. 

2. Yen strengthens (or stops weakening) → traders must buy back ¥ to repay loans → rapid ¥ appreciation. 

3. Unwind trigger → margin calls + risk aversion force traders to: 

   • Sell the high-yielding assets they bought (↓ US stocks, crypto, gold, etc.) 

   • Buy back ¥ → accelerates Yen rally and asset sell-off.

• Result: Rising Japan yields = carry-trade unwind → global risk-off, higher volatility, and pressure on anything funded by cheap Yen (biggest since 2022 happened when JGB yield broke 1% in 2023–2024 and again in 2025).

• Bottom line: Higher JGB yields → tighter Yen liquidity → forced deleveraging → pain for global risk assets.

Drops in Japanese Bond Yield Correlate with Stock Market Corrections

• Falling Japanese government bond yields (especially sharp drops) are one of the strongest leading indicators of global stock market corrections or crashes in the past 15–20 years.

• Historical correlation is very high (~80–90% of major S&P 500 corrections >10% were preceded by a notable drop in 10-year JGB yields within 1–8 weeks).

• Why the Correlation Is So Strong?

• Flight to Safety (Classic Risk-Off): Global investors panic → rush into the safest bonds → heavy buying of JGBs (and USTs) → Yields drop → Stocks Crash; The drop in JGB yields itself is usually the “calm before the storm” — it signals the peak of carry-trade leverage

• What happens when the yields drop sufficiently?

• Yen Carry Trade is the dominant marginal source of global risk capital. When JGB yields fall → borrowing ¥ becomes even cheaper → carry trade expands → risk assets (US tech, crypto, EM, high-beta stocks) get extra fuel → markets melt up.

• And so on, rinse and repeat.

• Based on the dominant cycle in the Japanese 10-Year Bond Yields, we might be approaching the end of the Risk-On Yen Carry Trade cycle and the start of the Risk-Off cycle.

BravoCyles on Youtube

• Watch my latest YouTube video about the Dow Jones Industrials 150 150-year super-cycle. 

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• If you are interested in financial markets, you are missing out by not following me on X, as I do not have enough space in the newsletter to post all my research, which I try to share on X. Additionally, I frequently post important real-time updates between newsletters.

Market Summary

• Financial markets were shaken overnight by a hint from BOJ about a possible rate hike in December.

• A gap down invited the dip crowd, but the gap was closed only in NDX.

• The moves look corrective. . .

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