Hyun Song Shin on How Big the Yen Carry Trade Really Is

Joe Weisenthal (0:03)

Bloomberg Audio Studios.

Tracy Alloway (0:05)

Podcasts, radio, news. Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:25)

And I'm Joe Weisenthal.

Tracy Alloway (0:26)

Joe, do you remember the Kerry Trade Unwind?

Joe Weisenthal (0:30)

So the Kerry Trade, what's the deal? Basically, people borrow yen and buy Nvidia, and then the yen went up, and then the trades didn't work as well.

Tracy Alloway (0:37)

Well, that was one aspect of the commentary.

Joe Weisenthal (0:41)

That's like the Twitter version of what's happening.

Tracy Alloway (0:43)

Yeah, but I think actually, okay, so we are recording this on August 23rd. The carry trade unwind happened, what was it, two weeks ago? Two or three weeks ago? It feels like a lifetime ago, and it's kind of remarkable how quickly it faded into the background with the market rally and the recovery. But the conversation at the time was that there is this carry trade which involves borrowing in lower yielding currencies or lower interest rate currencies such as the yen, and then investing in higher yielding assets like in theory, US technology stocks or US treasuries. Yeah. But the problem is that some of the discourse around this has been, I've been offended by some of it. I've seen things out there basically implying that the entire financial system is imploding because the carry trade is unwinding.

Joe Weisenthal (1:39)

It's really crazy how quickly that disappeared because there was that mega vol spike and we were talking like historically high levels on par with some of the financial crises. Then the expectation was like, at a minimum, this takes a while to settle down.

Tracy Alloway (1:56)

Yeah.

Joe Weisenthal (1:56)

It's settled down in about 15 minutes, in a day and a half.

Tracy Alloway (2:01)

Absolutely.

Joe Weisenthal (2:01)

It's like, what was that? What is the carry trade because there is this caricature version that is out there? Who actually is engaging in it? Is it still going on? Many questions in my head remain unanswered.

Tracy Alloway (2:13)

Yeah. And one of the big ones is just how big is it actually? And one of the funny things that happened a few weeks ago was people were basically looking at all the yen denominated assets in the world, like the entire Japanese banking system and saying, this is the carry trade. This is how big it is. OK.

Joe Weisenthal (2:30)

Let's clear up some misconceptions.

Tracy Alloway (2:32)

We are going to do that right now. And I am so pleased to say that we do, in fact, have the perfect guest. We are recording here in Jackson Hole, Wyoming, for the Kansas Fed Economic Symposium. And we have once again run into one of our favorite Odd Lots guests, an expert on this exact topic. We are going to be speaking with Hyun Song Shin. He is, of course, the economic advisor and head of research for the Bank for International Settlements. And he's been looking at the carry trade for years now. So Hyun.

Joe Weisenthal (3:02)

He actually knows what he's talking about.

Tracy Alloway (3:03)

Yes. Hyun, thank you so much for coming on Odd Lots.

Hyun Song Shin (3:06)

Thank you for having me again.

Tracy Alloway (3:08)

It's so good to see you again.

Hyun Song Shin (3:10)

Absolutely.

Tracy Alloway (3:10)

Beautiful.

Hyun Song Shin (3:11)

In person.

Tracy Alloway (3:11)

Jackson Hole. Absolutely. I'm so glad we could make this happen. And I am kind of glad that the carry trade unwind happened just a couple weeks ago.

Joe Weisenthal (3:19)

Something to talk about.

Tracy Alloway (3:20)

Yeah. And you happen to be here and you're an expert on this. So let's start with something very basic. What is the carry trade?

Hyun Song Shin (3:28)

The carry trade is a financial transaction where you borrow a currency with a low interest rate, and then invest the proceeds in other higher yielding assets. And I think the classical version of a carry trade would be where you borrow. I mean, it's basically a currency transaction where you borrow a currency with a low interest rate and invest in a higher interest rate currency. But the way that the carry trade was portrayed in the recent discussion, I think that was described in much broader terms, where you were going into all kinds of different assets. And Joe, as you describe, it was a very short lived episode of stress. But at the time, it was pretty intense.

Joe Weisenthal (4:14)

Yeah.

Hyun Song Shin (4:15)

And I think we can now look back on it with some relief that nothing broke. There was no financial market dysfunction, as we saw during the March 2020 episode, for example. So we're now back to something which looks more normal, but I think we should try and learn some lessons from that episode.