Global Carry Trade Returns Hit Multi-Decade Highs
Claire Weston
A basket strategy borrowing euros to buy Brazilian real, Colombian peso and Turkish lira has returned roughly 18% year-to-date — the best since 2005. Citi, Goldman and JPMorgan are all-in, but crowded yen shorts and a Fed communication overhaul loom as the two big risks.
Where does the 18% come from?
The carry trade — borrowing a low-rate currency, investing in a high-rate one, and pocketing the spread — has returned about 18% this year in a representative basket of euro-funded positions in the Brazilian real, Colombian peso and Turkish lira.
This means → it is the strongest performance for this period since 2005, driven not by any single currency but by a broad risk-appetite recovery combined with suppressed volatility.
One-month implied volatility on the Bloomberg Dollar Spot Index — a gauge of how much the market expects exchange rates to swing — fell last week to its lowest since December. The lower the vol, the thicker the safety cushion for carry.
Why is the euro replacing the yen as the funding currency?
The traditional funding currencies are the dollar and the yen, but the euro is taking over: the ECB benchmark rate stands at 2.25%, below the Fed's 3.5%–3.75% target range, making euro borrowing cheaper.
In plain terms = traders used to borrow yen because Japan's rate was near zero. Now the euro is cheap enough too — and using it means you are not betting everything on a single yen direction.
Hari Hariharan, CEO of hedge fund NWI, favors high-yielding currencies such as the real against the euro, yen and euro proxies like the Polish zloty. Year-to-date total returns on Brazilian and Colombian currencies versus the dollar have each reached at least 15%.
What are the big banks saying?
Citi, Goldman Sachs and JPMorgan have all endorsed carry strategies in recent research.
JPMorgan strategist Meera Chandan's team wrote last week: "Carry is the gift that keeps on giving, even as Middle East tensions have re-escalated over the past month."
This reflects a shared core assumption: the global economy has shown surprising resilience after the Iran conflict, risk appetite can persist, and volatility will not snap back suddenly.
Could the August 2024 blowup happen again?
The biggest risk to carry is a sharp currency move. In August 2024 the Bank of Japan's hawkish pivot sent the yen surging, triggering a stampede of carry unwinds and brief market turmoil.
Hedge-fund net yen shorts are now near their highest since 2007 — crowding that is itself a warning signal.
But Nuveen global investment strategist Laura Cooper cautions against over-extrapolating: "A rapid yen appreciation could still rattle risk assets, but an disorderly global carry unwind seems less likely." This means → markets have priced in the BOJ's policy shift far more fully than they had in 2024.
What else could kill this trade?
Standard Bank G-10 strategy head Steven Barrow points to the Fed: new chair Kevin Warsh has pledged to overhaul the communication framework, and markets expect that could mean less forward guidance.
Put simply = the real fear is not a rate hike itself but a hike with no warning — carry profits live on stable spreads, and a volatility spike can wipe them out in hours as currency losses eat the interest differential.
Investors worried about directional risk have already begun diversifying funding currencies into the Swiss franc and Australian dollar, aiming for an "all-weather" portfolio — but that diversification itself signals the market is not entirely complacent about tail risk.
Content is for reference only, not financial advice.