About three-quarters of global carry trades have been removed, JPMorgan strategists said in a note on Wednesday.
In its latest report, JPMorgan noted that the risk-reward ratio in global bonds is low due to the upcoming US elections and potential financiers’ re-pricing of low US interest rates. It also noted that interest rate momentum is expected to shift more significantly against the 10-year global bonds, favoring a rotation to value.
“Our view remains unchanged on both, but the baskets have already suffered significant declines in the wake of the tech selloff,” the strategists said in a note on Wednesday.
For G10, emerging markets and global portfolios, declines were around 10%, “meaning all positive returns so far this year have been wiped out,” they wrote.
“The losses have been ongoing since late May for emerging currency baskets, but more recent for the G10. The declines were large enough to significantly reduce the returns accumulated since late 2022.”
The spot component of the global carry basket indicates that 75% of carry trades have been removed, although this is not a completely reliable measure, as strategists point out.
JPMorgan notes that the decline in the strategy was large relative to stocks, which is less than the historical relationship between declines in foreign exchange investments and stocks.
The Wall Street giant points out that combining this with a light central bank calendar next month could provide a short-term opportunity to set the stage for a repricing, despite the deteriorating medium- and long-term backdrop they highlighted earlier.
The consequences of the recent sell-off on other signals were clear. Value strategies have risen accordingly, FX momentum has recovered much of its losses as currencies have re-pegged to price, and growth has held up well despite high volatility, the strategists explained.
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