Street.Com – One predictable mechanism has been framing the boundaries of the speculative game in global markets in recent years: the yen carry trade. This involves investorsborrowing cheap yen to invest in higher-yielding currencies and assets.
Carry-traders have been known to intensely rely on the trade to help fund risky bets on such things as emerging-market bonds, gold and other commodities, and perhaps even buying shares of Google (GOOG:Nasdaq – news – research – Cramer’s Take).
Given that the Bank of Japan (BOJ) has kept interest rates near zero for five years while the Federal Reserve had been telegraphing higher rates for the past 19 months, it has been a pretty safe bet to make such speculative bets.
But carry-traders, which include many hedge funds, are a jittery bunch. Big profits can quickly turn to big losses. And the risks are multiplied when those who have borrowed money to buy assets in the hope those assets would rise are suddenly facing a margin call. That’s when the creditor, usually a broker, demands a bigger minimum deposit guaranteeing the loan because the assets purchased by the borrower have declined.
