Large investors suggest that after a stellar year for this popular strategy, emerging market carry trades still have room to run in 2026. Weaker FX volatility and a soft US dollar provide fertile ground for the trade, where investors borrow low-yielding currencies to buy higher-yielding ones. Data shows a benchmark tracking this strategy has delivered ~17% returns this year—its strongest gain since 2009.

From Vanguard to Invesco, Goldman Sachs to Bank of America, asset managers and banks broadly expect the interest rate gap between developed and emerging markets to persist next year, with the Fed and most other major central banks likely maintaining lower borrowing costs. This environment should theoretically keep pressure on the USD, which has already declined over 7% in 2025.

"Carry trades still offer value, particularly in high-yielders like Brazil, Colombia, and select African markets," said Gorky Urquieta, co-head of emerging market debt at Neuberger Berman. However, after this year’s performance, "opportunities are becoming more selective."

**EM Carry Trade Profits Surge in 2025** This year’s feast of returns saw EM equities, bonds, and currencies rally sharply, with investors spoiled for choice among attractive carry trades. Currencies of countries like Brazil and Colombia—where benchmark rates remain elevated—gained over 13% against the USD.

The trajectory of the US economy remains pivotal to sustaining this performance. Ideally, investors hope for subdued growth to encourage further Fed easing, weakening the dollar’s appeal. A full-blown recession could trigger risk-off sentiment, while overheating risks reigniting rate hikes.

"With USD softness, carry will remain a source of returns," said Wim Vandenhoeck, Invesco’s co-head of EM debt, favoring the Brazilian real, Turkish lira, and South African rand. Earlier this month, Goldman Sachs’ Brian Dunn highlighted shorts on USD/BRL, USD/ZAR, and USD/MXN in a podcast—an equally weighted basket of these trades has yielded ~20% YTD.

Invesco has been selling USD/ZAR and EUR/HUF (the latter generating ~11% returns in 2025 including carry). Meanwhile, Bank of America advocates long BRL/COP, a relative value trade that has returned over 2%.

**EM Yields Still Outpace Peers** **Volatility Watch** Investors are also assessing whether FX volatility will stay subdued—a critical factor for carry trades, as adverse currency moves can swiftly erase months of gains. Current expectations are low, with JPMorgan’s 6-month EM FX volatility gauge near five-year lows.

Yet paradoxically, this calm unnerves some market participants. "Volatility is extremely low across many regions—my only concern is that this benign setup is already priced in," said Francesca Fornasari of Insight Investment.

Bank of America’s Adarsh Sinha flagged potential volatility catalysts, including US midterm elections and diverging central bank policies. Still, Vanguard expects turbulence from Trump’s April tariff announcement to remain contained in 2026.

"We don’t foresee massive volatility linked to policy instability or recession risks," said Roger Hallam, Vanguard’s global head of rates. "This tends to occur when EM currencies are performing adequately."