| Ripple Effect — May 14, 2025
We noted in this morning’s Swan Dive that 30-year U.S. bond yields are at 5% once again. Prior moves to this level have led to a sharp selloff over the past few years. This time may be different.
One reason? Deteriorating conditions in another key bond market – Japan. Best known for fighting deflation over the past few decades, Japan used to offer investors a near-zero yield – which in turn helped fuel “carry trades.”
This policy of borrowing in near-zero assets to buy higher yielding – and usually riskier ones – is a favorite among traders. Unless rates rise, since that compresses potential returns.
Today, Japan’s 30-year bond has soared to its highest yield in 25 years. And the country’s 40-year bond is at its highest yield since its inception, at 3.4%.  Remember last summer’s market selloff and soaring volatility index? It wasn’t just a tempest in a teapot. It was caused by fears that Japan would raise rates quickly, and compress the carry trade.
Today, Japan’s bond market is making that move even without its central bank. Just as how U.S. bond yields have jumped in the past year – despite the Fed cutting interest rates a full point.
Don’t be surprised if Japan’s rising yields spark another carry-trade unwind that roils the stock market. The good news? Unwinding leveraged trades takes dangerous leverage out of the global financial system.
-Addison | Coal fueled the first industrial revolution. Oil fueled the second. Now a silvery-white, energy-packed metal from Texas is about to fuel a THIRD, new era of American might. Three stocks are poised to lead the way. See the details here. | P.S. We remain positioned for big shifts in interest rates, however, they will likely break lower, either from a financial crisis or central bank rate cuts. When that happens, investors who lock in today’s high rates, particularly on longer-duration bonds, will see a big win. Our model portfolio holds two ETFs that can benefit from this trend.
As always, your reader feedback is welcome: feedback@greyswanfraternity.com (We read all emails. Thanks in advance for your contribution.)
How did we get here? Find out in these riveting reads: Demise of the Dollar, Financial Reckoning Day, and Empire of Debt — all three books are now available in their third post-pandemic editions. You might enjoy one or all three. 
(Or… simply pre-order Empire of Debt: We Came, We Saw, We Borrowed, now available at Amazon and Barnes & Noble or if you prefer one of these sites: Bookshop.org, Books-A-Million or Target.)
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