Core Insights - Emerging market carry trades are expected to remain effective through 2026, driven by low borrowing costs from central banks in developed economies and sustained interest rate differentials between developed and emerging markets [1][3]. Group 1: Performance of Emerging Market Carry Trades - The Bloomberg Emerging Market Carry Index has achieved a year-to-date return of 16.71%, the highest since 2009, when it reached 19.89% [3]. - In the previous five years, four years recorded negative returns, with rates of -2.84%, -5.02%, -0.52%, and -3.17% for 2020, 2021, 2022, and 2024 respectively [3]. - High benchmark interest rates in countries like Brazil, Mexico, and South Africa have resulted in three-month implied yields of 13.4%, 7.5%, and 6.6%, significantly outperforming developed economies [3]. Group 2: Market Sentiment and Strategies - The trajectory of the U.S. economy is seen as a key factor for the continued strong performance of emerging market currencies, with expectations of a slowdown encouraging the Federal Reserve to ease monetary policy [4]. - Investment firms like Invesco and Goldman Sachs recommend increasing short positions on the U.S. dollar against currencies such as the Brazilian real and South African rand [4]. - Neuberger Berman highlights that reduced volatility in the foreign exchange market and a weak dollar create favorable conditions for emerging market carry trades [5][6]. Group 3: Volatility Concerns - There is ongoing debate about whether low foreign exchange volatility can be maintained, as adverse currency movements could quickly erase gains [7]. - Current indicators from JPMorgan show emerging market currency volatility is near a five-year low, but concerns remain about potential increases due to factors like U.S. midterm elections and Federal Reserve policy divergences [7]. - Vanguard Group believes that market disruptions from events like Trump's tariff policies are diminishing, suggesting a stable environment for emerging market currencies in 2026 [7].