Key points
- Profits from interest rate differentials.
- Vulnerable to currency moves and volatility spikes.
- Unwinds violently during risk-off episodes.
Example
Borrowing yen at close to 0% to hold US Treasuries yielding 4% earns about 4% a year, but a 10% rise in the yen against the dollar would wipe that out more than twice over.
In history
In early August 2024, a Bank of Japan rate rise and weak US jobs data sent the yen sharply higher. Investors rushed to unwind yen carry trades: Japan's Nikkei fell 12% in a single day and the VIX briefly spiked above 60.
Related terms