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Treasury yield surge threatens popular emerging-market carry trades
Citigroup closed an EM carry basket after volatility rose, including long exposure to the rand, Mexican and Colombian pesos, and Turkish lira versus the Canadian dollar and Swiss franc.
LiveMint Markets, citing a Bloomberg note, said the recent spike in US Treasury yields is threatening carry trades that have been a go-to strategy for emerging-market investors this year.
The report said Citi closed its carry basket, which previously included long positions in the South African rand, Mexican and Colombian pesos, and Turkish lira against the Canadian dollar and Swiss franc, after a strong US PMI reading, a weak 5-year Treasury auction, and geopolitical headlines pushed market volatility higher.
It described carry trades as borrowing in a low-interest-rate currency to invest in a higher-yielding one, and said the strategy had been popular this year as carry trades funded by the US dollar were on their longest quarterly winning run since 2008.
The outlet also noted that global inflation concerns linked to higher oil prices are leading investors to rethink carry, adding that analysts warned carry tends to perform poorly during periods of high volatility and high crowding.