U.S. Treasury Yields Break 5%, Emerging Market Carry Traders Hold Their Ground
nashnova research
The 10-year US Treasury yield has broken 5%, yet Ninety One, Generali Asset Management, and William Blair are holding their emerging-market carry positions, calling last quarter's losses a position reset rather than a trend reversal — the variable that decides this bet is the dollar's direction, not the yield level itself.
Carry trades lost money for a quarter — why aren't these firms leaving?
Carry trades — borrowing cheap dollars to buy higher-yielding EM assets and pocketing the spread — posted their first quarterly loss in two years in July–September. 16 of 20 most-traded EM currencies lost money last month.
Yet Ninety One, Generali Asset Management, and William Blair still back the strategy. William Blair portfolio manager Yvette Babb said: "The recent setback is more likely a position reset than the start of a full unwind."
This means → these firms view the drawdown as a shake-out, not a trend reversal, so they are sitting tight rather than cutting losses.
With Treasury yields this high, how can carry trades still work?
The real killer for carry trades is not high yields — it is a rapidly strengthening dollar. Generali strategist Guillaume Tresca put it plainly: "What matters most is the dollar. It is the shock amplifier. If rates stay high but the dollar stays stable, carry trades still work."
The data back him up: in the five weeks to September 28, average Treasury yields rose 66 basis points, yet the Bloomberg Dollar Index gained only about 2% and remained below its year-to-date high.
In plain terms = yields jumped sharply, but the dollar barely moved — and that gap is exactly what gives carry traders the confidence to stay in.
Why did the September sell-off hurt so much more?
Several investors pointed to a crucial distinction: the September yield spike was driven by rate-hike expectations, which directly pushed the dollar higher. Carry trades were hit on both sides — EM assets lost value while borrowing costs rose.
Earlier this year, yields also climbed, but the dollar did not follow — and carry trades came through unscathed.
This reflects a deeper point: the same direction of yield movement can produce completely different outcomes for carry trades — watching whether yields rise is not enough; you need to know why they are rising.
What comes next? Selective picks replace broad bets
Babb expects the next phase of carry trading to be more selective and idiosyncratic, moving away from the "buy a basket of EM with your eyes closed" playbook of past cycles.
Her screening criteria come down to three filters: countries with credible policy, high yields, and a healthy balance of payments.
Nick Rees, head of macro research at Monex Europe, is more cautious, arguing that "the risk-reward calculus has changed" — Treasuries are increasingly attractive on both a yield and a safe-haven basis, shrinking carry trades' relative edge.
What single variable does this entire bet come down to?
Ninety One portfolio manager Thys Louw argues the bond market is repricing to reflect higher energy costs, resilient global growth driven by hyperscale capex, and increased borrowing by wealthy nations. He believes the market is "closer to the end of this repricing than the beginning."
This means → if the repricing is nearly done and volatility is peaking, the hardest stretch for carry trades may be almost over.
But the ultimate deciding factor is just one thing: whether the dollar stays relatively restrained. A stable dollar lets carry traders keep earning the spread; a dollar that rallies again on rate-hike expectations will accelerate losses.
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