Credit markets have thawed dramatically this week. Look no further than the Treasury curve for evidence. 1-month T-bills have a yield! You can get a solid 0.25 bp if you park your dough with Uncle Sam for 4 weeks versus a negative return less than 2 weeks ago. Long-term yields have soared as well.
Sure, supply concerns are at the root of the yield rise but a month or two ago there was not enough supply as the world piled into Treasuries as one of the only sure safe-havens. The fact that markets are concerned about prosaic matters like supply and demand is a sure sign of a return to normalcy. Return on capital is becoming a concern again, not just return of capital.
Against this backdrop, risk aversion plays would appear to be less desirable. With the market loaded to the gills with JPY, my guess is at some point we could see a sentiment reversal along the lines seen in the pound this week. EUR continues to struggle as Eastern and central Europe gets caught in the economic vortex, so EUR/JPY probably is not the best way to play any rise in risk appetite.
I’m gonna put my funny money on USD/JPY to be the breakout star. There is an ample supply of USD/JPY to go between 90.00 and 90.50, but if the big macro plays held by the market begin to turn around, they will be rapidly absorbed. If you can find a cheap options strategy ( a 92.00 one-touch?), that may be the way to play.
