Analysts predict capital inflows into the markets of Brazil, Turkey and Colombia
Emerging markets may attract significant investment inflows due to a weaker dollar and more favorable conditions for carry trade strategies, in which investors borrow in a currency with low borrowing costs and invest in high-yielding assets. Analysts name Brazil, Turkey and Colombia among the priority destinations, CNBC Top News reports.
Last month, U.S. Treasury Secretary Scott Bessent doubled the planned buyback of long-term U.S. government bonds. According to CNBC, the move was intended to ease pressure on long-term yields, which had risen amid concerns about inflation and government debt.
Weaker dollar and fund flows
Robin Brooks, a senior fellow at the Brookings Institution, said that efforts by major developed economies to reduce long-term government bond yields support carry trade. In his view, emerging markets may see a “wall of money.” He also believes that the risk of a sudden increase in borrowing costs for such transactions has decreased due to the involvement of the U.S. government.
According to TD Securities, global emerging-market bond funds recorded inflows of $967 million in the week through Wednesday. This is approximately 15% more than in the previous week, although overall inflows into bond funds slowed.
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After the bond buyback announcement, the South Korean won strengthened by 2.83% against the dollar, according to LSEG data. The Brazilian real rose by 0.64%, while the South African rand gained 0.59%.
High yields in Brazil and Turkey
Peter Kinsella, head of global FX strategy at Union Bancaire Privee, noted that conditions favoring carry trade, including low volatility and an overall decline in inflation, remain in place. He called Brazil and Turkey attractive destinations because of their high nominal and inflation-adjusted yields.
Brazil’s policy rate stands at 14%, while 12-month inflation as of mid-August was 4.2%. Turkey’s central bank kept its weekly repo rate at 37% in July, while annual inflation in the country stood at 31.75%.
BNY macro strategist Wee Khun Chong called Colombia a very popular carry trade destination this year. From the start of the year through Friday, the Colombian currency strengthened by about 20%, while the COLCAP stock index also rose by around 20%. At the same time, Standard Chartered Bank strategist Eric Robertson expects Asian currencies to continue underperforming currencies of other emerging markets, as they offer lower expected returns.
