Wealthion Macro Bites – How the Yen Carry Trade Unwind Is Driving a Global Bond Rout

Bloomberg reports the Mexican government is increasingly confident about a trade deal with the U.S. including reduced tariffs on key exports such as steel, aluminum and light vehicles.  The two nations are working on details of an agreement that would cut U.S. tariffs on light vehicles from the current 25% to 15%.  And since the full rate applies only to non-U.S. content, the effective tariff would be 10% to 12%.  By way of comparison, the U.S. recently offered Canada a 15% headline rate which could effectively fall to 7% after applying regional content discounts.

Yardeni Research suggests upward pressure in yields is partially due to a gradual unwind on the yen carry trade. “A more likely explanation for the global bond market rout is that the yen-carry trade is unwinding as the Bank of Japan raises its policy rate, forcing carry traders to sell government bonds they bought worldwide with proceeds from cheap yen loans…This trade allowed many governments run budget deficits without putting upward pressure on their bond yields.  Now, the chickens have come home to roost.”  France’s 10-year yield jumped to 4.855% yesterday up from 3.6% at the end of June, the biggest quarterly jump since ‘87.

The spread on CCC bonds has jumped above 1000 basis points over Treasuries for the first time since the regional banking crisis in ‘23.  CCC debt traded at 1007bps over Treasuries yesterday, up from 860bps at the start of the month.

India’s Information Minister announced Wednesday that India’s cabinet has approved a $19.42B renewable energy program to ‌help improve existing grids and add storage.  $14.2B will be directed to ​strengthening India’s transmission system within ⁠states to enable evacuation of up ​to 135GW of clean energy.  Additionally, $5.2B will be directed to an incentive scheme for installation of 50 gigawatt-hours of battery energy storage systems as India targets raising its non-fossil fuel based power capacity to 500GW by ⁠2030 ​from 304GW ​at present.

A Panamanian government commission recommended on Wednesday opening direct and formal negotiations with First Quantum Minerals to reopen the shuttered Cobre ​Panama mine (1% of global copper production until closed in ’23).  The commission's report recommends that Panama evaluate ‌a new agreement with First Quantum that would end pending international arbitration claims and allow the project to operate under conditions designed to finance an "orderly closure" of the mine over time (which could take decades) at no cost to the state.  On the news, First Quantum shares traded as low as -38% on the day before closing down 15%.

Chile’s national statistics agency Instituto Nacional de Estadísticas (INE) reports August copper output fell 12.8% y/y (from 423kt to 370kt).  The world’s largest copper producer was hit by effects of July storms and lower ore grades.