Barclays Plc said it will remove four funds ISEX

Any idea what this means and why the yen would give a poo about the ISEX?

PS Is it even called ISEX?

Usually it reflects an element of carry trade unwinding (investors paying back Yen loans), but I don’t know the specifics here.

Many hedge funds were playing the carry trade, borrowing in Yen at less than 1% and putting into other high yielding currencies like US dollar.
Now the hedge funds have to unwind those positions so the Yen gains versus other currencies.

I’m a bit hazy as to what is involved in an “unwinding”.

1 You borrow a billion yen at about 1% interest from some Tokyo entity or other.

2 You invest that money in, say US Treasury bonds.

3 US Treasury bonds pay such a premium over the regular payments required by the Tokyo entity in 1 above, that you have great profits.

4 ??? Something I don’t understand occurs

5 You are forced to end this arrangement, cashing out of your US T-bonds and repaying the Tokyo entity the entirety of the loan in a lump sum.

Do I have that right? Can anyone explain wha tthe hell is going on in number 4 that causes the unwinding?

I understand the carry trade but how does one UK bank divesting from ISEX effect the Yen? Maybe we really are the new world financical centre.

A large, disorderly fall in the value of the asset that you have borrowed to buy or a big drop in the value of the US dollar - you would unwind the trade in order to lock in the gains. Then you can start all over again and buy the same assets with less Yen

Just look at the headlines on Yahoo finance, the US economy is looking poorly. Yahoo are even offering advice on keeping your car for 200,000 miles and saving big bucks, very Un-American.

4: The yen gains, or people believe it will gain.

Say at time 0 JPY = 100 (say) you borrow 1bnJPY = 10mmUSD. So at time 0 you have -1bnJPY + 1mmUSD = 0

If you assume that JPY is fixed at 1:100 to USD, and further that you are paying 0.5% in JPY and 4.5% in USD (numbers out of my arse) you can see how this is an attractive propostion - you are earning 4% of 10mmUSD and, chances are, you had to put up much less equity than that in the first pace, so you are earning >> 4% on whatever equity you put in.

Now, let FX rates vary. As everyone follows the trade the JPY decreases in value (because the trade involves selling the Yen). So now the FX rate is 110. So now your trade is -1bnJPY = -9.09mmUSD, and +10mmUSD. So your long + short position add up to a gain of nearly 1mmUSD. Plus, you are still earning that 4%. Nice.

However, at some stage, something will happen that will make people believe that they want to stop the trade. Either they think the interest rates will change in the countries or they think others thing the same or they think the FX rate will change or whatever. Something happens. And what then ensues is that the JPY starts to rise. As it starts to rise people start to close out the carry trade => people start selling USD and buying JPY => more JPY appreciation etc. So, if you get out first you make a killing, if you are a bit too slow you get wiped out. For instance, what, in these circumstances, is to stop JPY going to 90, or 80, or whatever (there might be a reason, I don’t trade FX).

Anyway, “unwinding” means selling your usd asset, doing an FX spot trade into JPY, and repaying your JPY loan.


Shows markets are becoming risk averse. Carry trade is very risky.


One bank can have an effect on a price if they were highly leveraged ie, closing a large position of > 1 billion USD and if they close it all in one go.

Hedge funds are now in trouble and are selling their assets in a hurry. Thats causing volatility in prices.

Thanks, LookingForYield