Global Carry Trades Face Major Setback

Three-quarters of the global carry trade has been wiped out, with a recent market selloff erasing this year’s gains, according to JPMorgan Chase & Co.

The bank’s quantitative strategists, Antonin Delair, Meera Chandan, and Kunj Padh, reported that returns in Group-of-10, emerging markets, and global carry trade baskets have fallen by about 10% since May. These losses have not only erased year-to-date returns but have also significantly reduced profits accumulated since late 2022.

The carry trade strategy, which involves borrowing at low interest rates to invest in higher-yielding assets, has been under pressure for months. The situation worsened last week as global market volatility surged due to concerns over rapid Federal Reserve rate cuts and a larger-than-expected rate hike by the Bank of Japan.

JPMorgan noted that the recent selloff has been twice as fast as usual during a carry trade drawdown, though there could be a slight opportunity for a rebound in August, given a lighter central bank calendar and cooling volatility.

Despite this, the strategists cautioned that the global carry trade strategy currently offers a poor risk-reward profile. They highlighted that the yield on the carry trade basket has dropped since its peak in 2023 and is no longer sufficient to justify holding high-beta emerging market assets, especially with the looming risks of the U.S. elections and further adjustments in low-yield assets if U.S. rates decline.