Euro and European Periphery Bonds strength hooked on BoJ’s Abenomics, Reversal Time Coming?

Speaking of carry trades, do you know that BoJ’s ‘Abenomics’ stimulus has fostered the the recent strength of the euro and the latest comeback or reprise of the European peripheral bond’s convergence trade? Part of today's risk ON landscape has been due to this too.

From Bloomberg’s chart of the day: (bold mine)

Euro-area peripheral bonds are hooked on Japan’s monetary stimulus.

The CHART OF THE DAY shows Europe’s peripheral bond rally stalled this month as the yen strengthened versus the euro. Last week the Bank of Japan refrained from adding to the 60 trillion yen ($589 billion) to 70 trillion yen poured into the monetary base each year that has encouraged Japanese investors to put money into higher-yielding European assets.

“Peripheral yield spreads appear vulnerable to a correction following the strong rally and the yen tends to often strengthen on credit risk,” said Anezka Christovova, a foreign-exchange strategist at Credit Suisse Group AG in London. “Japanese portfolio flows usually have an impact. Those flows could now divert elsewhere. We don’t expect any substantial action from the Bank of Japan in coming months and that could also lead the yen to strengthen.”

Japanese investors bought a net 1.41 trillion yen of long-term foreign debt in the week ended May 16, the most since Aug. 9, data from the finance ministry in Tokyo showed on May 22. Flows into Europe may be tempered as yields in Europe’s periphery climb. The average yield spread of 10-year Portuguese, Greek, Spanish and Italian bonds over German bunds has risen 20 basis points this month to 270 basis points, after touching 239 basis points on May 8, the lowest since May 2010, based on closing prices.

New York-based BlackRock Inc., the world’s biggest money manager, said on May 8 it had cut its holdings of Portuguese debt, while Bluebay Asset Management said on May 9 it had seen the majority of spread tightening it was looking for.

This yen euro carry perspective has been shared by my favorite laser focused bubble watcher Credit Bubble Bulletin’s Doug Noland: (bold mine)

Importantly, Draghi’s “ready to do whatever it takes… And believe me, it will be enough” was a direct threat aimed at speculators that had accumulated large bets against European debt and the euro. It’s my view that the Fed and BOJ’s extraordinary measures to devalue the dollar and yen – as the ECB refrained from QE - were instrumental in bolstering the vulnerable euro. And with global central banks supporting the euro coupled with Draghi promising a bond backstop, suddenly European periphery bonds were transformed into an incredible opportunity for speculation - in a world awash in free-flowing speculative finance. Stated differently, the major central banks dictated that the hedge funds and speculators reverse their bearish euro-related bets and instead go leveraged long. This powerful Bubble flourishes to this day.

Aside from ensuring financing flows of government, QEs and ZIRPs have implicitly been meant to suppress “shorts” or bearish bets on the asset markets. In other words, monetary policies have directed to massage market prices by fueling a an asset boom. This is the Bernanke/Yellen-Kuroda-Draghi put in action.

Yet if the BoJ will remain resolute in abstaining from providing further stimulus, then the Yen-Euro carry will reverse and most likely bring back Risk OFF environment. But will the BoJ just take the heat from the Wall Streets of the world?

Also, has the Philippine central bank chief's repeated mentioning of the concerns over foreign "hot money" flows been tacitly referring to this yen-euro carry?

Very interesting times indeed.