BANGKOK (AP) — The mayhem that swept across world markets this week was partly caused by a market strategy known as the “carry trade.”
Japan’s benchmark Nikkei 225 plunged 12.4% on Monday and markets in Europe and North America suffered outsized losses as traders sold stocks to help cover rising risks from investments made using cheaply financed funds borrowed mostly in Japanese yen.
Markets recovered much of their losses on Tuesday. But the damage lingers.
They were jolted by a combination of factors, including dread of a possible recession in the United States, the world's largest economy, and worries that technology shares have shot way too high this year.
But the scale of the declines was exaggerated by the rush to sell U.S. dollars due to carry trade deals that had helped drive markets to record levels.
Carry trades involve borrowing at low cost in one currency to achieve higher returns from investments in another currency. One of the most recent examples has been to borrow Japanese yen, expecting the currency to remain cheap against the U.S. dollar and for Japanese interest rates to remain low. The borrowed funds would then be invested in U.S. stocks and Treasury bonds in anticipation of a higher return.
The key factor behind a carry trade is a difference in interest rates. The Bank of Japan has kept interest rates at or near zero for years, trying to encourage more spending and spur economic growth. Last week, it raised its main interest rate from nearly zero. Higher interest rates tend to boost the value of a nation's currency, and the Japanese yen surged against the U.S. dollar. Traders scrambled to sell higher risk, dollar-denominated assets to cover suddenly higher borrowing costs, plus losses from foreign exchange rate changes and losses in asset values as share prices plunged. Also, hedge funds that conduct carry trades use computer models to help maximize their returns versus their risks. They needed to sell shares to maintain acceptable risk profiles.
Carry trades tend to make the most sense when foreign exchange rates are relatively stable and investors can tap into higher yielding market opportunities, like the recent runups of stock prices in places like the United States. The recent market upheavals obliged traders to cover their debts by buying yen and other carry trade currencies and selling relatively more of the higher risk assets they bought under more favorable conditions. Also, carry trades are very lucrative when stocks or other investments are rising, but losses can snowball when thousands of traders are pressured to sell stocks or other assets all at once. “A massive global carry trade unwind was the spark that lit the fuse for this market Armageddon," Stephen Innes of SPI Asset Management said. “One defining characteristic of these self-perpetuating market melts is the vicious cycle where a sell-off increases realized volatility.”
The gap between the main interest rate in Japan, now at 0.25%, and the Federal Reserve’s benchmark rate of 5%-5.25% is still wide but is likely to narrow as the Fed cuts rates and Japan raises its rates. Financial markets appeared to have calmed Tuesday, with Japan's Nikkei 225 index gaining 10.2% and other markets mostly higher. Analysts are divided over whether this bout of volatility in the markets has passed or if there is more to come. Regardless, carry trades have been used for decades. They contributed to a meltdown in Iceland's financial sector in 2007-2008 where investors borrowed in yen or Swiss francs to take advantage of high Icelandic interest rates. During this latest market upset, Mexico, another focus of the yen carry trade, has seen its peso fall more than 6%. The popular but potentially complicated trading strategy is likely to remain a wild card for investors, especially in times of high market volatility.
Currency traders watch monitors near a screen, back, showing the Korea Composite Stock Price Index (KOSPI), top left, and the foreign exchange rate between U.S. dollar and South Korean won, top center, at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Tuesday, Aug. 6, 2024. (AP Photo/Ahn Young-joon)
A U.S. Border Patrol agent who was killed in Vermont during a traffic stop near the Canadian border was a military veteran who worked security duty at the Pentagon during the time of the Sept. 11 attacks, his family said.
“He was a devoted agent who served with honor and bravery,” a family statement provided to The Associated Press late Tuesday said. “He had a tremendous respect and pride for the work he did; he truly embodied service over self.”
Agent David Maland, 44, was killed Monday afternoon following a traffic stop, a U.S. Customs and Border Protection spokesperson said in a statement. A German national in the country on what the FBI called a current visa was killed and an injured suspect was taken into custody and is being treated at a local hospital.
The violence temporarily closed part of Interstate 91 about 20 miles (32 kilometers) from Canada in Coventry, part of the small, 27,000-resident community of Orleans County in the Northeast Kingdom section of Vermont that straddles the international border.
Maland, whom the FBI confirmed was a U.S. Air Force veteran, was killed close to the U.S. Customs and Border Protection’s Newport Station, part of the Swanton Sector that he was assigned to. The sector encompasses Vermont, parts of New York and New Hampshire, and includes 295 miles (475 kilometers) of international boundary with Canada.
The Derby Line–Rock Island Border Crossing is located about 12 miles (19 kilometers) by highway north of Coventry. It’s a major link to the Canadian province of Quebec, giving northern Vermont more French speakers than most of New England.
“U.S. Customs and Border Protection’s thoughts and prayers are with Agent Maland’s family during this difficult time,” the agency said in a statement. The death is a tragedy, said Gov. Phil Scott and state Sen. Russ Ingalls, a Republican who represents the area.
Maland's family said his career spanned nine years in the military and 15 in the federal government.
“While working in Washington, D.C., he was active security in the Pentagon during 9/11,” their statement said.
The family later said Wednesday that Maland's duty station was the Pentagon and that when news of the attacks broke, he was sent to guard an undersecretary to one of the branches of the military for several days at a bunker at the Joint Base-Anacostia Bolling, in southeast Washington.
Maland also was a K-9 handler. Before heading to the northern border, he served in Texas, near the border with Mexico.
The Minnesota native who family members called by his middle name, Chris, was about to propose marriage to his partner, said an aunt, Joan Maland.
“We are all devastated,” she told AP in a text. She called him an “exceptional person. Incredible man.”
David Maland was the first Border Patrol agent to be killed in the line of duty since Javier Vega Jr. was shot and killed near Santa Monica, Texas, in 2014, according to records provided by U.S. Customs and Border Protection. Vega was initially considered to be off duty at the time of his death, but in 2016 it was re-determined to have been in the line of duty, the agency said.
In 2010, Brian Terry ’s killing exposed the botched federal gun operation known as “Fast and Furious.” Border Patrol Agent Nicholas J. Ivie, of the Brian A. Terry Border Patrol Station, was mortally wounded in the line of duty in a remote area near Bisbee, Arizona, in 2012. Border Patrol Agent Isaac Morales was fatally stabbed while off duty in 2017 in Texas.
Cars are backed up at the US-Canada border in Stanstead, Quebec, after a shooting involving a U.S. Border Patrol agent in Coventry, Vt., Monday, Jan. 20, 2025. (AP Photo/Chloe Jones)
HOLD This image taken from video provided by WCAX shows police cars closing off a road after a shooting involving a U.S. Border Patrol agent on Interstate 91 near Coventry, Vt., Monday, Jan. 20, 2025. (WCAX via AP)
A sign on an unpatrolled border street entering into Derby Line, Vermont, U.S.A., from Stanstead, Quebec, oTuesday, Jan. 21, 2025. (Christinne Muschi/The Canadian Press via AP)
Cars are backed up at the US-Canada border in Stanstead, Quebec, after a shooting involving a U.S. Border Patrol agent in Coventry, Vt., Monday, Jan. 20, 2025. (AP Photo/Chloe Jones)
A sign on an unpatrolled border street entering into Derby Line, Vermont, U.S.A., from Stanstead, Quebec, Tuesday, Jan. 21, 2025. (Christinne Muschi/The Canadian Press via AP)