The Carry Trade Has Two Legs. USDJPY Is Only Pricing One.
Research preview
Rates have repriced; the yen has not. The US 10-year yields 5.25% and 2s10s sits at +46bp, yet USDJPY trades near 158.210 — roughly 255bp above its carry. That dislocation is the subject of this note: the curve, the two legs of the yen carry, and the levels with invalidation. The read: the trade is the spread, not the level. USDJPY is 255bp rich to its carry, and the spread itself is the invalidation. What the US curve just did US 2s10s sits at +46bp — the 10-year at 5.255%, the 2-year at 4.791%....
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