EM Carry Trade Extends Winning Streak to Seven Quarters, Longest Since 2008
Nashnova编辑部
The dollar-funded carry trade into high-yielding EM currencies has posted positive returns for seven consecutive quarters, delivering a cumulative ~22% gain that dwarfs U.S. Treasuries and EM bonds — the longest winning streak since 2008.
What is the carry trade, and why does a seven-quarter streak matter?
The carry trade — borrowing in a low-rate currency and investing in a high-rate one to pocket the difference — has now been profitable for seven straight quarters, the longest run since 2008.
A Bloomberg index tracking eight major EM currencies shows a cumulative return of roughly 22% since end-2024, far ahead of U.S. Treasuries (5.9%), EM sovereign dollar bonds (14%), and EM corporate bonds (10%).
This means → carry is not just beating "safe" assets; it is outperforming bonds within the EM universe itself, as capital pays up for the twin reward of high yields plus currency appreciation.
Where are the returns coming from — interest or exchange rates?
The key amplifier is a weakening dollar: the greenback has been falling against major EM currencies while also softening against low-rate funding currencies like the euro and Swiss franc, creating a "yield spread + FX gain" double payoff.
Colombia's peso delivered a 48% carry-trade return over twelve months, composed of 12% in bond income and 45% in spot appreciation.
Even Turkey's lira, down 26% against the dollar, still left investors in profit thanks to local ten-year yields above 32%. In plain terms = the interest rate was high enough to absorb the currency loss and still come out positive.
What are institutions saying — is there still room to run?
PGIM, with $1.5 trillion under management, ranks the carry trade as its highest-conviction theme. EM debt head Cathy Hepworth calls it "a carry world — lots of money chasing yield," favoring sub-Saharan African frontier markets plus Turkey, Colombia, and Brazil.
UBS Global Wealth Management CIO Alejo Czerwonko expects positive total returns for EM currencies over the next twelve months, preferring euro- and Canadian-dollar-funded positions long South African rand and Mexican peso.
TS Lombard's Daniel Von Ahlen notes the U.S. Treasury's announcement this week to buy back more long-dated bonds, aiming to push down long-end yields. This reflects a policy-level move that actively reduces the dollar's relative appeal — and adds fresh fuel to the EM carry trade.
What is the biggest risk?
Goldman Sachs strategist Kamakshya Trivedi sees improving inflation as enough to keep the Fed on hold, but warns that a rapid rise in long-end rates remains a near-term threat. As long as the move is not too sharp, high-real-rate EM currencies should keep delivering positive total returns.
State Street senior EM strategist Ning Sun says U.S. economic data are not yet strong enough to reverse the risk appetite supporting carry, and still favors Colombia's peso, South Africa's rand, and Turkey's lira.
This means → the real danger is not losing money today but crowding: once vast capital piles into the same direction, any revival in Fed-hike expectations that sends the dollar higher could trigger concentrated unwinds — and the resulting volatility in high-yield currencies would be the true stress test for this strategy.
Content is for reference only, not financial advice.