The emerging market carry trade is back on, helping to chase higher the very assets that were sold off last year amid concerns U.S. interest rates were set to rise.
“The U.S. yields haven’t actually risen,” said Nizam Idris, head of fixed income and foreign-exchange strategy at Macquarie. “That environment encourages funds to look for yields,” which can typically be found in the very current account deficit countries that were sold off last year, he added.
A carry trade is when investors borrow in a low-yielding currency, such as the yen and sometimes the U.S. dollar, to fund investments in higher yielding assets somewhere else. A weakening currency is central to the carry trade since it means that investors have less to repay when they cash out of the trade.
“Until U.S. yields start to rise, this trading strategy could be profitable,” Idris said, noting the beneficiaries include the Australian dollar and the Turkish lira as well as high-yielding bonds, like the new offerings from one-time financial market pariah Greece. This week, Greece sold its first international bond issue in four years, priced at an initial yield of 5-5.25 percent.