Carry trade: War-driven gains question durability – Commerzbank

Commerzbank’s Michael Pfister notes that G10 and Gelişen Piyasalar (EM) carry trades have delivered strong paper gains, helped by Iran-related market moves and high-yield currencies like the Brazilian Real and Mexican Peso. He stresses there is no empirical evidence of systematic long-term outperformance and warns that recent EM carry performance is heavily interest-income driven, with exchange rates still recovering from 2024 losses.

War effects lift carry performance

"Since the beginning of the year, however, these strategies have continued to deliver positive results on paper. A G10 strategy in particular has outperformed pure interest income. But this is not because the strategy itself is good."

"The carry trade strategy benefits during such times not only from interest income, but also from exchange rate movements favouring it. For G10 carry traders, the first quarter was therefore a very good one on paper. While I don't fundamentally reject this strategy, every market participant should bear in mind that there is no empirical evidence of systematic long-term outperformance."

"One more point: in recent years, EM carry trade strategies have also grown in popularity. Here, too, exchange rate movements played a major role, with many high-yield emerging market currencies performing exceptionally well last year (for example, the Brazilian real and the Mexican peso). The Bloomberg EM Carry Trade Index has accordingly also shown exceptionally strong performance since the beginning of 2025."

"But be cautious: this is largely due to interest income, and the exchange rate component is still trying to make up for its poor performance in 2024."

"Of course, this doesn't mean that the strategy never performs well in the short term when exchange rate movements support it for certain reasons, although it is questionable whether one wouldn't have been better off relying on other strategies during such phases."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)