Emerging markets are poised to attract a surge of investor capital as the U.S. dollar weakens following the Treasury’s expanded bond buyback program, according to analysts cited by CNBC.
Last month, Treasury Secretary Scott Bessent doubled planned buybacks of longer-dated U.S. government debt in an effort to ease upward pressure on long-term yields, which had climbed on inflation and debt concerns. The move has rippled through global markets, shifting investor focus toward higher-yielding assets abroad.
Robin Brooks, a senior fellow at the Brookings Institution, said markets are looking for places to “ride out the debt bonanza.” He expects emerging markets to see a “wall of money” as developed economies attempt to cap longer-dated yields, a dynamic that supports the carry trade—borrowing in a low-yielding currency to invest in higher-yielding assets. Brooks noted that the usual risk for carry trades, a sudden spike in borrowing costs, has been diminished by U.S. government involvement.
Data from TD Securities shows global emerging market bond funds recorded inflows of $967 million in the week to Wednesday, up roughly 15% from the previous week, even as overall bond fund inflows slowed.
Currency gains and gold
The dollar’s weakness has lifted several emerging market currencies. Since Bessent’s bond buyback announcement, the South Korean won has strengthened 2.83% against the dollar, the Brazilian real gained 0.64%, and the South African rand rose 0.59%, according to LSEG data.
Peter Kinsella, global head of FX strategy at Union Bancaire Privee in London, said the Treasury’s announcement signaled that “the U.S. could potentially engage in policies which are akin to financial repression,” leading to a weaker dollar and benefiting high-yielding G10 and EM currencies. He added that the broader environment for carry trade outperformance—low volatility and falling inflation—remains “firmly in place.”
Gold has also gained as investors seek safe havens, with Deutsche Bank and Bridgewater Associates founder Ray Dalio among those backing the precious metal.
Preferred markets
Kinsella favors Brazil and Turkey in emerging markets, citing their high nominal and inflation-adjusted yields. Brazil’s benchmark interest rate stands at 14% with 12-month inflation of 4.2% as of mid-August, giving it one of the highest real rates among major economies. Turkey’s central bank left its one-week repo rate unchanged at 37% in July, though annual inflation is 31.75%.
Wee Khoon Chong, macro strategist for Asia Pacific at BNY in Hong Kong, said Colombia has been “very popular” for carry trades this year. The Colombian peso was up around 20% year-to-date through Friday, and the COLCAP benchmark stock index gained a similar amount.
In the G10, Kinsella favors the Australian and Norwegian currencies.
Asia underperforms
Asian currencies are expected to continue lagging their emerging-market peers, according to Eric Robertson, chief strategist at Standard Chartered Bank. Speaking to “Squawk Box Asia” on Monday, he said Asian currencies tend to offer lower implied yields, a pattern likely to persist if the Federal Reserve moves toward a rate hike. India’s central bank key rate is 5.25%, among the highest in Asia but well below Brazil’s.
Brooks noted that dollar-funded carry trades are just getting underway after emerging markets experienced “massive outflows” due to the Iran war. He added that the Treasury’s bond buyback signal suggests there could be more measures “in more places with ever greater intensity” over time.
Source: www.cnbc.com — https://www.cnbc.com/2026/09/01/emerging-markets-dollar-carry-trade.html
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