U.S. Treasury Selloff Hits Emerging Market Carry Trades as Citi Closes Related Basket Positions
nashnova research
US Treasury yields have surged to multi-decade highs, and Citi has unwound its emerging-market carry basket; this signals that the year's most crowded FX strategy faces systemic headwinds and its winning streak may be over.
What is the carry trade actually earning?
The carry trade — borrowing in low-rate currencies to invest in high-rate ones, pocketing the spread — has posted its longest quarterly winning streak since 2008 in its dollar-funded version this year.
Citi's basket held longs in the South African rand, Mexican peso, Colombian peso, and Turkish lira, funded by the Canadian dollar and Swiss franc.
In plain terms = borrow cheap, buy high-yield assets, and collect the spread — it works as long as exchange rates stay calm, but when volatility spikes, the spread cannot cover the losses.
Why did Citi unwind now?
Citi analysts cited a triple trigger: strong US PMI data, a weak 5-year Treasury auction, and geopolitical headlines — all pushing market volatility higher.
The bank wrote: "We have shown in the past that carry trades typically underperform during periods of high volatility and high crowding."
This means → no single event forced the exit; it was the broad rise in volatility that destroyed the strategy's risk-reward profile.
How far have EM currencies fallen?
Bloomberg's index tracking cumulative carry returns across eight major EM currencies is down nearly 1% this month, on pace for the biggest monthly drop since March.
After the Fed's rate hike, the Colombian peso fell 6.6% and the Mexican peso dropped 2.6% — both among the most popular carry targets.
This reflects a harsh reality: when Treasury yields surge, the "yield moat" around high-rate currencies cannot stop capital from flooding back into the dollar.
What does Bank of America say — is the trade still viable?
BofA strategist Raghav Adlakha warned that positioning is overcrowded and struck a clearly cautious tone.
He outlined three conditions for a carry-trade comeback: falling rate volatility, range-bound US rates, and oil back below $100.
In plain terms = all three must line up at once — right now none of them are in place, so the window for this strategy is effectively shut in the near term.
What to watch next?
The core variables are just two: can Treasury yields stabilize, and can oil prices pull back.
Rising oil is lifting global inflation expectations. This means → central banks may be forced to hold rates higher for longer, which in turn keeps squeezing the carry trade's room to breathe.
If both variables continue to deteriorate, the market faces not just Citi's exit but a potentially broader unwinding cycle.
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