Goldman Sachs: Carry Trade Conditions at Best Levels Since 2000
Miles Bennett
Goldman says G10 carry-trade appeal has hit a 25-year high — rate differentials sit at historically wide levels while FX volatility has dropped to its lowest since 2020, but Barclays warns that calm may reverse at any moment.
What is a carry trade, and why does Goldman say conditions are the best in decades?
A carry trade — borrowing in a low-rate currency, investing in a high-rate one, and pocketing the spread — needs two things at once: a wide rate gap and stable exchange rates.
This means → right now both conditions are at extremes: the U.S. two-year yield tops 4%, Switzerland's sits near 0.1%, and spreads are historically wide; the JPMorgan FX volatility index hovers at its lowest since 2020.
In plain terms = a wide spread means higher income; low volatility means exchange-rate swings are less likely to wipe out that income. Both appearing together push carry-trade appeal to its highest level since 2000.
How much has the carry trade made this year — and how does it compare?
G10 carry trades have returned roughly 8% year-to-date, outperforming global bonds, gold, and bitcoin.
They still trail equities — this reflects the carry trade's nature as a "slow, steady earner," not a momentum play.
This means → for a multi-asset portfolio, the carry trade's value lies not in topping the return table but in drawing on a different risk source than stocks, adding diversification.
What does Goldman recommend — borrow what, buy what?
Funding currency (borrow side): top pick is the Japanese yen — USD/JPY is near a forty-year low for the yen, and Goldman expects further weakness unless the macro backdrop shifts. The Swiss franc and euro are also listed as funding candidates.
Trade direction: Goldman favors long USD vs. Swedish krona; in a "risk-neutral" scenario, long EUR vs. Swiss franc — a pair seen as offering one of the highest carry-to-volatility ratios among major crosses.
The bank also favors long AUD vs. New Zealand dollar.
What is the biggest risk — and why is Barclays pushing back?
The carry trade's fatal flaw: interest income accumulates day by day; an exchange-rate loss can strike in minutes. A volatility spike triggers crowded unwinds that amplify the very move they're responding to.
Barclays warned this week that the calm in FX markets diverges from elevated global economic uncertainty; its model shows the probability of volatility rising exceeds that of it falling.
In plain terms = the premise behind Goldman's "best conditions" is exactly the link Barclays considers most fragile — whether low volatility can last. Both banks are reading the same chart; one focuses on the left half, the other on the right.
Content is for reference only, not financial advice.