Business & Finance
Analysts predict surge of carry trade capital into emerging markets after U.S. debt intervention
High-yielding currencies in Latin America and Turkey attract interest as the U.S. Treasury's expanded bond buybacks weaken the dollar.
The short version
- A massive influx of investor capital is expected to target emerging markets as the U.S. Treasury's expanded buybacks of long-term debt have eased pressure on yields and weakened the U.S. dollar.
- Countries with high nominal and inflation-adjusted interest rates—including Brazil, Turkey, and Colombia—are favored targets for carry trades, which involve borrowing cheaper currencies to invest in higher-yielding ones.
- Asian currencies are projected to underperform their emerging market peers due to lower implied yields, which makes them less attractive target investments.
Key facts
- U.S. Treasury Secretary Scott Bessent doubled planned buybacks of longer-dated U.S. government debt to lower long-term yields, which has contributed to a weaker dollar.[CNBC]
- Global emerging market bond funds recorded inflows of $967 million in the week ending Wednesday, representing a 15% weekly increase.[CNBC]
- Brazil is favored by investors due to its 14% benchmark interest rate and 4.2% mid-August 12-month inflation rate, providing some of the highest inflation-adjusted yields among major economies.[CNBC]
- Turkey remains a favored destination for carry trades, with its central bank holding its one-week repo rate at 37% in July against an annual inflation rate of 31.75%.[CNBC]
- Colombia has been popular for carry trades, with both its currency and the COLCAP benchmark stock index rising approximately 20% year-to-date through Friday.[CNBC]
What remains uncertain
- The long-term impact of potential Federal Reserve rate hikes remains to be seen, with analysts noting that if the Fed hikes, Asian currencies could continue to underperform due to their low implied yields.[CNBC]