HSBC warns: Malaysia and Mexico will become the "biggest victims" of yen arbitrage trading liquidation.

HSBC said that if Japanese bond yields rise further, leading to Japanese investors withdrawing funds domestically, then the bond markets in Malaysia and Mexico will face the highest risks. HSBC strategists Alastair Pinder and Pankaj Agarwala wrote in a report that the analysis of emerging market bonds and stocks held by Japanese investors suggests that Malaysia, Chile, and Mexico have "excessive risk exposure." They added, "Large sell-offs of Japanese government bonds could also prompt a repatriation of overseas equity investments, from this perspective, India and South Africa seem vulnerable to impact." The strategists wrote that while the potential for unwinding of carry trades (i.e. investors selling high-yield assets to unwind positions financed in yen) poses the "greatest risk," the probability of such an event occurring in the short term is limited. Last week, Japanese government bond prices plummeted, causing Japanese government bond yields to soar to historically high levels and triggering global market volatility, prompting traders to closely monitor whether Japanese investors are withdrawing funds domestically. Japan has around $5 trillion in capital invested overseas, not including yen borrowed by foreign funds for global financial asset investments. HSBC strategists wrote in a report on January 26 that the rise in Japanese government bond yields could also put upward pressure on global bond yields, thereby damaging bond valuations. They added that analysis of the relative market returns associated with changes in the 10-year US Treasury bond yields indicates that countries like South Korea face the greatest risks. Amid the plunge in Japanese government bonds, concerns have arisen about Prime Minister Kaishu Asano's tax cuts and spending increase plan leading to worries about fiscal overexpansion. With the upcoming election on February 8 and rumors swirling about authorities possibly intervening in the markets to support the yen, traders are closely watching for any escalation in market volatility.