Three-quarters of global carry trades removed: JPMorgan Chase & Co

Three-quarters of the global carry trade has now disappeared, according to JPMorgan Chase & Co., after a recent sell-off wiped out this year’s gains.

Returns in Group-of-10, emerging market and global carry trade baskets tracked by the bank have fallen about 10 percent since May, quantitative strategists Antonin Delair, Meera Chandan and Kunj Padh wrote in a note to clients. The moves have wiped out year-to-date returns and significantly reduced gains accrued since end-2022.

“The spot component of the global carry basket would indicate that 75 percent of carry trades have been removed,” the JPMorgan team wrote, reiterating that “the clock is ticking for G10 carry.”

The carry strategy, which involves borrowing at low rates to finance purchases of higher-yielding assets elsewhere, has been faltering for months. Carry trades took a beating last week as global market volatility increased amid fears of rapid rate cuts by the Federal Reserve and after the Bank of Japan’s bigger-than-expected rate hike.

The recent sell-off has been twice as fast as normal carry-drawdown, with strategists suggesting there may be little chance of a recovery in August as “the central bank agenda for this period is light and volatility has already started to cool.”

However, the global carry trade strategy “does not offer an attractive risk-reward trade-off,” they pointed out. “Basket yields have tumbled since the 2023 highs and do not adequately compensate for holding EM high betas through the US election and the risk of further repricing of low yielders if US yields decline.”