As you may or may not be aware, there’s a USD funding crunch afoot. The reason: US money market reform which kicks in in October and has driven up LIBOR by reducing the stash of short-term, unsecured lending available to banks and corporations via CDs and commercial paper. This is a potentially $800 billion shift which has real implication for markets.
One of the interesting things to note recently is the extent to which this dynamic has actually made the cost of FX hedging USD exposure so expensive, that the Japanese bid for Treasurys (driven by low yields in Japan) is actually set to dry up because it simply is not longer profitable.
Below, find Deutsche Bank’s breakdown of the rising cost of USD funding for Japanese investors:
(Chart: Deutsche Bank)
What does that mean? Well, you reach: for duration or for yield.