The emerging-market carry trade — borrowing in cheap currencies like the US dollar to invest in higher-yielding EM assets — has entered its longest winning streak since the 2008 financial crisis. A softer dollar and persistently low US rates have revived the strategy, pushing yields on EM bonds to levels that outpace many developed-market alternatives. Colombia exemplifies the trend, where sovereign bond returns have surged alongside a robust peso appreciation, delivering double-digit gains for foreign investors. Turkey, despite a weakening lira, continues to offer some of the world’s highest local-currency yields, keeping the trade attractive for those willing to absorb currency volatility.
For Indian retail investors, the ripple effect is noticeable. Fresh capital chasing EM yields can influence global risk sentiment, occasionally prompting a modest pullback in the Nifty and Sensex as funds rotate between markets. Moreover, Indian banks with exposure to EM debt may see improved net interest margins, while EM-focused mutual funds and ETFs become more appealing for diversification. Nevertheless, the strategy carries heightened currency risk and can reverse sharply if the dollar regains strength.
Investors should weigh the potential upside against volatility, consider hedging tools, and limit exposure to a proportion of their portfolio that aligns with their risk tolerance. A balanced approach can capture the upside while protecting against sudden swings.