US Bond Yield and Japanese Yen Correlation

Over the past few years, there has been a high correlation between the US 10 year bond yield and the Japanese Yen. I believe that this relationship is due to the fact that the Bank of Japan has increasingly been a major source of liquidity for global markets. When the BoJ is putting its foot down on the accelerator it causes the Yen to decline (up in USDJPY terms). But this liquidity is also inflationary, so bonds sell off (higher yields).

Here is the chart of the USDJPY versus the US 10 Year Treasury bond yield over the past few months. 10 Yr Yield (yellow line) vs USDJPY (white bar)</a> </div>

I am not sure which asset is leading and which is following, but the US 10 year yields and USDJPY rate have basically traded on top of one another during this period.

When you step back a little further, you will notice that this relationship goes through periods where the two assets separate for a time, but that they have so far eventually reverted back. 10 Year Yield (yellow line) vs USDJPY (white bar)</a> </div>

Like many other correlations, this relationship has slightly broken down over the last month. Bonds have rallied sending yields lower, but the Yen has so far refused to rise (lower USDJPY rate).

If I had to guess, I think this is just another hint that the recent bond market rally is one that should be faded.

Re-shorting bonds

And yesterday, after re-reading what I wrote about the speculators’ positioning, I decided to pull the trigger on the beginnings of a bond short position.

I have been torn about the timing of this trade. In my heart of hearts, I think that the bond market is a great long term risk reward short position. But I recognize that the recent rally has caught many traders offside. The relentless short covering rally has been difficult to fade.

However the best trades are often taking the other side of the “in your face news.” And there is no doubt that the bond market rally has been at the forefront of the news media’s agenda. My research feed is filled with constant analysis about why US bonds are relatively good value versus other world bond markets. The talk about how deflation is the real worry is once again thick. And to top it all off, CNBC added a special TLT ticker.

Last week we had a big push that drove US 10 year yields down to 2.40%. 10 Year Treasury Yields</a> </div>

Since then the bond market has sold off rather aggressively. Could that rally have been the final push on this short covering move?

I am willing to give that theme a whirl for a bit. Yesterday I started a 10 year short position. I will add to it in the coming days. I am hoping I will get another chance to short 2.50s.

The Ukrainian situation continues to spiral downward

It is funny what markets choose to focus on. A month ago the markets were in a constant tizzy over each tank movement in Ukraine. At that point there was actually very little fighting and most of it was posturing by each side.

Since then, the situation has completely deteriorated into a full civil war.

I understand that from a geo-political perspective the situation has become less worrisome because Putin appears to have stood down. But given the quick decent into a full out war, I wonder how long that will be the case.

Have a look at this post by ZeroHedge that shows the bombing that is occurring in the cities. Or this link that shows photos of the fighting. Or how about this morning’s headline that 181 people were killed and 293 injured in a Kiev military operation?

Right now the market is ignoring the fighting, but given the escalation, I wonder how long market participants will be able to keep their hands over their ears screaming “nanananana, I can’t hear you.”