This week, unorthodox geopolitical maneuvers by U.S. President Trump and campaign tactics in Japan have stimulated rapid developments in financial markets. Trump threatened a new trade war against European allies after demanding Denmark cede control of Greenland to the U.S., though he quickly abandoned this stance. In Japan, Prime Minister Sanae Takaichi's pledge to cut taxes, despite the nation's heavy debt burden and persistent inflation, has triggered market turbulence. The result has been a series of high-profile trades that have rapidly delivered substantial returns or significant losses.
The following details the history, current status, and potential future of some of the most popular market strategies: The basis trade, a widely used hedge fund strategy, has garnered attention in recent years despite occasional historical losses. This strategy involves borrowing funds, typically in the repo market, to buy and sell bonds while establishing opposite positions in the futures market. It aims to profit from tiny price discrepancies between the two markets. Proponents argue it provides a crucial source of demand for government bonds amid soaring debt in developed markets.
However, this trade carries extreme risk. Because price differences are minuscule, investment firms must employ massive borrowing to amplify gains for profitability. This leverage and the trade's reliance on short-term funding periodically raise concerns among policymakers and regulators. The exact scale of basis trading is difficult to estimate, and this lack of transparency itself worries policymakers. In January, Morgan Stanley estimated the U.S. basis trade had grown approximately 75% since 2019, reaching around $1.5 trillion.
Bond yield curve steepening trades are unsettling investors in the long-term bond market again, due to growing global government debt burdens, the unfolding effects of recent central bank rate cuts, and the potential for accelerated future economic growth. Additionally, in the U.S., fears about the Federal Reserve's independence under Trump are a factor. These elements are prompting some investors to revisit the "yield curve steepening trade," which profits when the curve's slope increases.
This can occur when long-term yields rise faster than short-term yields during bond market downturns, or when they fall less than short-term yields during market rallies. Short-dated bonds have become a popular choice as fund managers exit long-term bonds, which are highly vulnerable to fiscal and inflation risks in the coming years. Meanwhile, interest rate cuts are supporting short-term bonds by lowering their yields.
This trade gained fresh momentum this week as geopolitical tensions flared over Trump's tough stance toward U.S. allies and growing worries about Japan's fiscal health, easing earlier debates about the trade's staying power as firms like PIMCO began taking profits. The yield spread between German 2-year and 30-year government bonds widened to its highest level since 2019 on Wednesday, while the U.S. Treasury yield spread hovered near a four-year high.
In Japan, the spread between 2-year and 30-year bond yields also hit its highest level since records began in 2006 amid a bond market sell-off this week. Long-term bonds found some respite on Thursday after Trump withdrew his tariff threats against Europe, but fund managers, including Allspring Global Investments and Fidelity International, expect this relief may be temporary given fragile market sentiment.
The carry trade involves investors borrowing in a country with low interest rates, selling the local currency, and reinvesting the proceeds in a country with higher rates. In theory, exchange rates should adjust over time to reflect interest rate differentials. In practice, carry strategies can persist for months, years, or even decades, coexisting with broader global capital flow imbalances.
The carry trade has flourished, largely because foreign exchange volatility fell to multi-year lows last year. An index measuring the strategy showed an approximate 18% return for buying eight emerging market currencies against the U.S. dollar. This is the highest level since 2009, driven by strong spot yields and high interest rates in Latin American economies.
Since the carry trade ultimately aims to earn small interest gains over time—and loans must be repaid in the original currency—sharp exchange rate movements can quickly erase profits. This week's significant turmoil in Japan threatened the sustainability of a substantial portion of carry trades, as many are funded by yen loans due to Japan's long-standing negative rates and directed toward higher-yielding emerging markets.
In 2024, such positions unwound rapidly as Japan hiked rates, with investors selling assets to repay loans, an effect that rippled globally. With Japanese government bond yields near their highest levels since the late 1990s and investors wary of official intervention to support the yen, the strategy's effectiveness may be diminished compared to last year.
On Wednesday, Joe Mazzola, Chief Trading and Derivatives Strategist at Charles Schwab, stated that the yen carry trade is "resurfacing." Mazzola said, "Japanese policy rates and yields are at multi-decade highs, and U.S. risk assets are being affected. The question is, how long will this last?"
The currency debasement trade suits investors worried about ballooning government budget deficits who are fleeing sovereign debt and currencies for other stores of value like precious metals. This is based on the belief that such commodities are more insulated from inflationary government policies and the modern financial system based on fiat currencies like the U.S. dollar, euro, and yen.
Gold's strong rally since last year partly reflects this strategy. Central banks (especially in emerging markets), asset managers, pension funds, and other institutional investors have been buying gold to protect their wealth from loose monetary policies that could erode currency purchasing power. Concerns over unpredictable consequences during this week's Greenland incident injected new momentum, pushing precious metal prices to a record high of $4,915 on Thursday.
Gold is expected to continue benefiting from the debasement trade if investors keep diversifying away from U.S. assets. The "Sell America" trade has seen fluctuating momentum over the past year. Volatility stemming from Trump's policies is a key factor, as traders reduce exposure to U.S. assets due to new risks created by the president's rapid-fire statements and sharp divergence from Biden's policies.
This sentiment was strongest in April: first with Trump's announcement of sweeping tariff plans, followed by his threat to fire Fed Chair Powell. In both instances, the S&P 500 suffered heavy losses, U.S. Treasury prices plummeted, and the safe-haven status of U.S. assets was questioned. This week, trade issues resurfaced as Trump escalated his push to annex Greenland and threatened new tariffs on U.S. allies in Europe if they didn't support his plan.
Tech stocks often bear the brunt. Their dominance in the U.S. stock market, with the so-called "Magnificent Seven" having an outsized impact on major indexes due to the AI boom driving their market caps significantly higher, makes them vulnerable. However, as the Greenland dispute showed, the "Sell America" strategy often proves fleeting and ineffective, partly because Trump's unpredictability leads traders to generally assume he will likely abandon his most disruptive proposals.
This week was a case in point: the S&P 500 fell 2.1% on Tuesday but recouped most of its losses after Trump softened his rhetoric on Greenland. The popularity of the so-called 60/40 portfolio—60% stocks and 40% bonds—aims to balance equity upside with bond protection during market downturns. A rally in both stocks and bonds propelled the U.S. 60/40 index to a 13.8% gain in 2025.
But the strategy came under pressure this week as both stocks and bonds weakened simultaneously, threatening in January to post its first negative month since last April, when Trump's so-called "Liberation Day" tariffs shook world markets. The index ultimately rebounded and is now above its average for the month. Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, said, "The risk is that economic data rebounds strongly, yields rise," and the market no longer expects further rate cuts this year, leading to increased stock market volatility.
Trump Trades: TACO and Big Mac. While Trump's policies prompt some to "Sell America," others place bets based on his rhetoric—firstly, betting he won't follow through. This strategy, dubbed "TACO" ("Trump Always Caves On"), has proven effective repeatedly. The first year of Trump's second term has exhibited a distinct pattern: he threatens high tariffs on China, stocks plunge; he then backs down, and markets rally.
For instance, last October, Trump threatened 100% tariffs on China before quickly retracting. U.S. stocks experienced their worst day in six months due to the tariff threat, then surged rapidly after the president withdrew it. This week, stocks rallied again after Trump softened his stance on Greenland. A concern with this strategy is that if Trump's announced hardline policies fail to spook investors and cause significant market swings, he may have less incentive to concede.
Secondly, another Trump-related trade strategy stems from the November midterm elections and his efforts to reverse low poll numbers before voters go to the polls, termed the "Big Mac" trade strategy ("Midterm Action Battle Coming"). Ed Clissold, Chief U.S. Strategist at Ned Davis Research, believes this will be a theme this year, with market focus shifting to policy plans unveiled around the congressional elections.
These moves are already impacting markets. Under pressure to curb inflation, Trump recently demanded credit card issuers cap interest rates at 10%, causing some financial stocks to plummet. His demand that defense contractors halt dividend payments and invest in production also sparked concerns about those companies. Furthermore, Trump's call for government intervention in the mortgage market to lower rates has clouded the prospect of Fannie Mae and Freddie Mac escaping government control, causing their share prices to fall.
A "widowmaker" trade refers to high-risk financial investments prone to massive losses. In Japan, this term has become almost synonymous over the past two decades with shorting Japanese Government Bonds. The concept is simple: borrow and sell JGBs, expecting prices to crash, then buy them back to profit from the difference. This approach repeatedly caused losses for global investors when the Bank of Japan kept borrowing costs near zero.
Now, as Japan's bond market experiences one of its most severe repricings in years, this notion is being challenged. A combination of factors is driving the trade's revival: the BOJ's exit from yield curve control, a reduction in bond purchases, and Prime Minister Takaichi's push for tax cuts. Fears that Japan's long-term borrowing needs will grow faster than expected have pushed ultra-long-term JGB yields to multi-decade highs, causing global market tremors.
The widowmaker trade, once synonymous with losses, has suddenly become profitable—though risks remain. While inflation is no longer dormant, the BOJ is tightening policy (albeit cautiously), and fiscal discipline is not as expected, current yields may be sufficient to attract domestic Japanese buyers back, potentially limiting further rises. Traders say uncertainty over fiscal policy and the pace of BOJ rate hikes could keep market volatility elevated.
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