Thursday, January 07, 2010

Carry trade

Amidst a report on a BIS invitation to bankers and monetary officials to discuss "risk-taking", there is this from the FT:
“For example, low financing costs coupled with a steep yield curve may make participants vulnerable to future increases in policy rates – a situation reminiscent of the 1994 bond market turbulence which followed the Federal Reserve’s exit from a prolonged period of low policy rates.”

This is a good example of the carry-trade and something that could be studies through the effect on the yield curve of the 1994 move towards tighter monetary conditions.

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