USD/JPY daily chart
The craziest thing about the market reaction during covid was when bonds blew up.
In the most risk-off week in generations, the global safe haven didn’t work. Yields jumped and it forced the Fed to launch unlimited QE, including days when the Fed bought $300 billion in bonds.
That was frightening but it was also telling as were the many other non-sensical moves during covid. What they revealed was that the market had layered on massive amounts of leverage in trades that weren’t as liquid as they seemed.
Moving forward, we got many more examples of that as zero rates in the post-covid era led to huge equity market gains in an incredible bull market that cracked when inflation and rate hikes came.
Many might have thought that +5% borrowing rates cured that leverage and that the lessons of covid were learned. That wasn’t the case. We’re learning just how crowded the yen carry trade was.
Obviously much of that money made its way into the Japanese market given the lack of currency risk. However it’s now abundantly clear that yen borrowing was everywhere and hugely leveraged.
And maybe it’s not all yen borrowing (it’s not), the problem is that everyone and everything is far too levered.
Now we deal with the consequences.