T. Rowe Manager Who Predicted Yen Shock Sees Another Coming

(Bloomberg) — Arif Husain says he was early in sounding the alarm about rising interest rates in Japan last year, which he described as a “San Andreas financial fault.”

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The head of fixed income at T. Rowe Price warned that investors “have just seen the first shift in this mistake and there is more” market volatility ahead after July’s rise in national interest rates helped trigger a violent reversal in yen transfer transaction. .

While a beleaguered Bank of Japan and jitters about slowing U.S. growth helped spark voracious demand for the yen on Aug. 5, investors may be ignoring a deeper root of the global swoon that has spread across stocks, currencies and bonds. Husain wrote in a report. That includes a mountain of Japanese money invested offshore that is at risk of being flown back home as rates rise ever higher in the world’s fourth-largest economy.

“Scapegoating the yen ignores the beginning of a larger, deeper trend,” according to Husain, whose firm oversees about $1.57 trillion in assets. “The BOJ’s monetary tightening and its impact on global capital flows is far from straightforward and will have a big influence over the next few years.”

The sudden abandonment of yen trading, which involves selling the Japanese currency to invest in higher-yielding assets, helped push the Nikkei 225 stock average down by the most since 1987 and fueled a surge in the VIX index of stock market volatility. Economists briefly predicted the Federal Reserve would have to step in with half-a-point cuts or act between meetings — the kind of step usually reserved for a crisis.

While the yen has settled into a mid-140s trading range against the dollar, volatility remains high. Anticipated Fed tapering and further BOJ tightening could rattle markets again sooner rather than later.

Husain, who has nearly three decades of investment experience, favors an overweight allocation to Japanese government bonds, arguing that capital is likely to return to the country as yields rise. He also likes an underweight position in US Treasuries – securities he sees could come under pressure as Japanese institutions move out of the US for home.

Yields on Japan’s 10-year government bond rose a basis point to 0.915 percent on Tuesday, the highest since Aug. 6.

“At some point, higher Japanese yields could lure the country’s huge life insurance and pension investors back into JGBs away from other high-quality government bonds,” Husain wrote. “In effect, this would rearrange demand in the global market.”

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