Brazilian President Luiz Inacio Lula da Silva speaks to the media at the BRICS Summit in Rio de Janeiro, Brazil, July 7, 2025. Reuters/Ricardo Moraes
Ricardo Moraes | Reuters
Emerging markets are likely to see a surge in capital from investors looking for new opportunities after the U.S. Treasury’s bond-buying plan weakened the dollar, analysts said.
U.S. Treasury Secretary Scott Bessent last month doubled down on plans to buy back long-term U.S. Treasuries to ease pressure on long-term yields, which have soared on concerns about inflation and debt.
Robin Brooks, a senior fellow at the Brookings Institution, said in a post last week that the market is looking for a place to “ride out the benefits of debt.”
Brooks said emerging markets are expected to face a “wall of money” as some major advanced economies seek to lower yields on long-term government bonds, ultimately supporting carry trades that borrow cheap currencies and invest in higher-yielding assets.
He said the carry trade’s biggest risk, a sudden spike in borrowing costs, was mitigated by the U.S. government’s involvement.
Inflows into global emerging market bond funds rose about 15% from the previous week to $967 million in the week to Wednesday, despite an overall slowdown in bond inflows, according to data from TD Securities.
Bessent’s intervention has helped push gold prices higher as investors seek a safe haven, with Ray Dalio, founder of Deutsche Bank and Bridgewater Associates, among those backing the precious metal.
Peter Kinsella, global head of foreign exchange strategy at Union Bancare Privy in London, said the Treasury announcement signaled to markets that “the United States may engage in policies akin to financial repression.” “This led to a weaker US dollar, benefiting high-yielding G10 and emerging market currencies.”
The South Korean won has appreciated by 2.83% against the dollar since the announcement of Bessent’s bond buyback, according to LSEG data. The Brazilian real rose 0.64% and the South African rand 0.59%.
Kinsella said the broader environment for carry-trade outperformance remains “well in place”, including low volatility and significantly lower inflation.
He said Brazil and Turkey are favorites among emerging markets as they continue to boast high nominal and inflation-adjusted yields. He added that Australian and Norwegian currencies were given preferential treatment in the G10.
Brazil has one of the highest inflation-adjusted interest rates among major countries. The base interest rate is 14%, and the 12-month inflation rate was 4.2% as of mid-August.
Turkey’s central bank kept the weekly repo rate unchanged at 37% in July, even though the country’s annual inflation rate was 31.75%.
Wee Koon Cheong, macro strategist for Asia Pacific at BNY in Hong Kong, said Colombia is “very popular” for carry trades this year.
The country’s currency has risen about 20% since the beginning of the year through Friday, with the benchmark stock index COLCAP also up about 20%.
Meanwhile, Eric Robertson, chief strategist at Standard Chartered Bank, told Squawk Box Asia on Monday that he expects Asian currencies to continue to underperform emerging market currencies. This makes Asian currencies undesirable as investment targets.
He said Asian currencies tend to have lower implied yields than other currencies, and this pattern is likely to remain even if the U.S. Federal Reserve moves to raise interest rates.
India’s central bank’s main interest rate is one of the highest in Asia, at 5.25%, almost a third of Brazil’s rate.
Brooks said the carry trade with dollar funds is just beginning, given the “massive capital outflow” from emerging markets as a result of the Iran war.
He added that the Treasury Department’s bond buyback announcements signaled that further measures could be taken “in more places and stronger than ever” over time.
