The Federal Reserve is indeed cutting interest rates, but what’s even more concerning is the Bank of Japan’s move to raise rates.

For a long time, the Japanese yen has had almost zero interest rates, making it a "free financing tool" in the eyes of global investors. The operation is simple: borrow low-interest yen, convert it to US dollars, and then pour into high-yield pools like US Treasuries and US stocks. This strategy is called "carry trade," and it has allowed countless institutions to rake in huge profits.

But now, the Bank of Japan has started to raise rates. The interest rate differential between the US and Japan is narrowing, directly squeezing the profit margin of carry trades—potentially even turning it negative. As a result, traders are forced to unwind their positions: selling off US dollar assets and converting back to yen to repay debts. Once this move happens on a large scale, the US dollar will be heavily sold off, and capital will start to exit the US market.

The founder of Jacobs Investment Management put it bluntly: this could trigger a tightening of global financial conditions and worsen liquidity. Although the market generally believes that, after the shock in August last year, carry trade positions have already been reduced significantly, so the impact this time may not be as severe. But the problem is, the Fed is still shrinking its balance sheet, and dollar liquidity is already tight. If this happens now, it’s like pouring fuel on the fire.

When liquidity tightens, risk appetite will be suppressed. US Treasuries, especially long-term bonds that are sensitive to liquidity, may face selling pressure in the short term. The market nerves are extremely tense right now.