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Multi-leg trade turned profitable as corporate cross-currency hedging flows helped push yen swap rates above JGB yields
Hedge funds holding Japanese government bond (JGB) asset swaps have been the main beneficiaries of a rush by Japanese corporates to hedge their US dollar issuance, which has triggered a sharp rise in yen swap rates relative to JGB yields.
The asset swap trade popular with hedge funds involves borrowing US dollars, converting them into yen via fixed-fixed cross-currency swaps, and using the proceeds to buy JGBs. This effectively leaves them long JGBs and short pay-fixed swaps – a position that
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