Will Japan put an end to the party?

Could this week's decision by the Japanese central bank to raise interest rates spell the beginning of the end to the lucrative carry trade?

Ian Robinson, manager of the F&C Corporate Bond Fund, said that following two years of rate rises across the globe, Japan stands alone as a cheap funding source for carry trades

"Yesterday's decision by the bank to raise interest rates by a quarter-percentage point to a still very low 0.5% raised fears that the carry trade would soon come to an end. Reassuringly, the bank has said it would continue to employ a conservative strategy going forward. Indeed it would seem that it will be some time yet before they spoil the party," said Robinson.

This, of course, is good news for corporate bond investors.
"Essentially, by borrowing in low yielding currencies and reinvesting in higher yielding assets, investors are using leverage to exacerbate demand for financial assets. The impact has been to keep asset prices high and credit spreads low thus forcing investors to accept a higher level of risk in the desperate hunt for returns.

"In the world of corporate bonds this predominantly means seeking out bonds rated at the lower end of investment grade or as high yield. The problem is further fuelled by Japanese investors who continue to seek out assets elsewhere in the world rather than receive close to nothing in local bank accounts." added Robinson.