Archive · 25 Sep 2026
Treasury Rout Threatens Popular Emerging-Market Carry Trade Strategy
A carry trade is a way investors try to earn money from differences in interest rates.
They borrow a currency with low interest rates and buy one with higher rates.
This strategy had been popular with investors in emerging markets.
Recently, US Treasury yields rose sharply and markets became more nervous.
That made the strategy riskier.
Citigroup stopped one group of these trades involving several emerging-market currencies.
Those currencies have fallen since the Federal Reserve raised interest rates last week.
Bank of America said the trades might work again if interest-rate volatility decreases and oil stays below $100.
Citigroup Inc. closed a carry basket involving the South African rand, Mexican and Colombian pesos, and Turkish lira.
The basket was funded against the Canadian dollar and Swiss franc.
A strong US PMI report, weak five-year Treasury auction, and geopolitical headlines increased market volatility.
An emerging-market carry index is down almost 1% this month, its largest decline since March.
Bank of America Corp. warned that developing-market currency positioning is becoming stretched, though the strategy could recover if volatility and oil prices fall.
- Who
- Citigroup Inc., Bank of America Corp., and emerging-market investors.
- What
- A rise in US Treasury yields and market volatility is pressuring emerging-market carry trades, prompting Citigroup to close a carry basket.
- When
- The developments were reported in a Thursday note; the currencies had declined since the Federal Reserve raised interest rates last week.
- Where
- Global financial markets, involving emerging-market currencies and US Treasury markets.
- Why
- Higher Treasury yields, inflation concerns linked to oil prices, increased volatility, and crowded investor positioning have weakened the trade.
Cautionary View
Conditional Recovery View
Near-term trade outlook
Cautionary View
Carry trades typically perform poorly when volatility and investor crowding are high, and current positioning appears stretched.
Conditional Recovery View
The strategy could regain strength if interest-rate volatility falls and US rates remain within a stable range.
Role of oil prices
Cautionary View
Higher oil prices are contributing to global inflation concerns and making investors rethink emerging-market carry positions.
Conditional Recovery View
If oil remains below $100, the carry-trade theme could return, according to Bank of America strategist Raghav Adlakha.
- Citigroup action
- Closed a carry basket involving the South African rand, Mexican peso, Colombian peso, and Turkish lira.
- Funding currencies
- The basket was positioned against the Canadian dollar and Swiss franc.
- Monthly performance
- A Bloomberg index tracking eight major developing-nation currencies was down almost 1% for the month.
- Currency declines
- The Colombian peso fell 6.6% and the Mexican peso fell 2.6% after the Federal Reserve's rate hike last week.
- Market triggers
- A strong US PMI report, a weak five-year Treasury auction, and geopolitical headlines fueled volatility.
- Bank of America view
- The bank warned that positioning in developing-world currencies is becoming stretched.
- Potential recovery conditions
- Carry could return if rates volatility declines, US rates remain range-bound, and oil stays below $100.