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Bonds Are Going Crazy and How to Trade the Yen

Posted on May 13, 2015 13:52


Bond market volatility has dramatically spiked around the world, seeing German Bunds rally almost 5 basis points in the last weeks and a similar rally in US 10-Year Treasury Yields. There is also a suspicious jump in Japanese Yen shorts in the last Commitment of Traders report which could mean that smart money accounts are getting ready for a rise in USD/JPY.

Yen COT Positions

We can see from the chart above that hedge funds (large traders) have increased bets on the Japanese Yen falling to 31,183 net short futures contracts, which amounts to about $3.2 billion in long positioning in USD/JPY.

The reason why smart money is increasing bets on the Yen falling against the Dollar is because of the rising differential in bond yields around the world.

US 10-Year Treasury Yield

Because of the Federal Reserve’s insistence that they will raise interest rates sometime this year, even in the face of some weak economic numbers, bond investors are starting to take heed and sell sovereign debt.

Quite the opposite is true in Japanese debt markets where the 10-year yield on benchmark Japanese Government Bonds is remaining below 0.5 percent, inside a range since the beginning of this year.

The payoff in all this is a possible breakout in USD/JPY, which is something that the market looks to be poised to do in the short to medium term.

Weekly USD/JPY Chart

USD/JPY has been in a tight consolidation triangle this year, and picking up some longs between 119 and 118.50 could be a good setup for a target into 125 in a month or two.

The information provided is for educational purposes only and should not be considered as investment advice.

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Monday, 25 May, 2015 / 12:23

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