Emerging markets carry trades getting harder to resist

India

BANGKOK: Emerging-market carry trades are looking increasingly attractive to traders weighing risk against reward, as global central banks signal policy easing and yields in developed nations slide.

India’s rupee and Turkey’s lira offer a higher yield per unit of expected risk than any Group-of-10 currency or member of the JPMorgan Emerging Market Currency Index, according to a Bloomberg analysis of three-month yields and implied volatilities. 

The 10 currencies in the emerging market gauge yielded an average 5.9%, more than twice the equivalent interest rate for the dollar.

Here’s the Bloomberg study:

"Investors are cautious, but it’s only natural for them to look at emerging markets,” said Toru Nishihama, emerging-market economist at Dai-ichi Life Research Institute Inc. in Tokyo. "The Fed is completely dovish, the developed-market yields are so low, and there’s ample liquidity.”

With the Federal Reserve signaling its first cut since 2008, borrowing costs in the euro zone and Japan deeply negative, and central banks in Australia and New Zealand cutting rates, investors seeking to exploit differences in global borrowing costs are getting more bang for their buck this year in developing economies.

Volatility has also been falling, as the US and China agreed to resume their trade negotiations. A carry-to-risk ratio, which divides yields by implied volatility to measure the attractiveness of carry trades, has risen to 0.66 from a low of 0.40 in September, according to Bloomberg calculations.

Methodology

The dollar yield referred to three-month London interbank offered rate. Yields for other currencies were derived from three-month currency forwards.

The implied yields and volatility rates used in the table were the average of the most recent 20-day reading to smooth fluctuations. - Bloomberg