SPY Analysis: Carry Trade Unwind Risks & Liquidity Concerns Amid BOJ Rate Hike Speculation

This analysis combines a Reddit discussion [5] on SPY’s exposure to carry trade unwinding with internal market data [0] and external sources. Key drivers include Bank of Japan (BOJ) rate hike speculation (56% probability in December 2025 [2]) and recent repo market liquidity stress. SPY saw a -3.03% drop on November 20, 2025, followed by partial recovery, with volume spiking to 165.29M shares on the drop date [0]. The NY Fed injected $24.4B via the Standing Repo Facility (SRF) on November 28, signaling short-term funding pressure [1]. Cross-domain links are clear: BOJ policy impacts yen carry trades (borrowing yen to buy US assets like SPY), and unwinding these trades could lead to forced selling [4]. Treasury market liquidity is another concern—electronic trading hit an eight-year low [3].

1. Global Policy Spillover
   : BOJ rate hikes (non-US policy) directly affect US equities via the yen carry trade, underscoring global market interconnectedness [2,4].
2. Leading Indicators
   : Repo market stress (e.g., SRF injections) serves as an early warning for broader liquidity issues, preceding SPY’s November 20 drop [1,0].
3. Volatility Drivers
   : SPY’s price movements reflect both macro factors (BOJ policy) and micro dynamics (ODTE trades [5]), increasing short-term volatility risk.

• Carry Trade Unwind
  : A BOJ rate hike could trigger yen carry trade unwinding, leading to forced selling of SPY and risk assets, potentially increasing short-term volatility [4,5].
• Liquidity Squeeze
  : Ongoing repo market stress and Treasury liquidity issues may exacerbate price drops if systemic selling occurs [1,3].

• Fed Intervention
  : Market participants expect Fed intervention during severe stress, which could lead to a sharp SPY rally [5].

• SPY Price: -3.03% drop (Nov 20) followed by recovery; close at $683.39 (Nov 28) [0].
• BOJ Hike Odds: 56% (Dec 2025) [2].
• Repo Injections: $24.4B via SRF (Nov 28) [1].
• Sector Performance: Energy (+1.14%) outperformed; Financial Services (-0.00092%) underperformed [0].