Wall Street's Carry Trade Delivers Biggest Returns in Decades

Carry trade strategies are generating their strongest global currency returns since 2009, with a Bloomberg benchmark up 17% in 2025, as muted volatility and wide interest-rate differentials draw Wall Street trading desks back in force.

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Wall Street is back in the carry trade — and the profits are proving hard to ignore. A resurgence in carry trade strategy across both developed and emerging markets has delivered returns unseen since the aftermath of the 2008 financial crisis, propelled by a weaker U.S. dollar, suppressed forex market trends favoring low volatility, and interest-rate differentials that, in some corridors, exceed 1,400 basis points. As of mid-July 2026, the strategy is drawing renewed commitment from major institutions including Goldman Sachs (GS), JPMorgan Chase (JPM), Bank of America (BAC), and BNY Mellon (BK).

What Happened

The core mechanics of carry trade are straightforward: borrow in a low-yielding currency, convert and invest in a high-yielding one, and pocket the differential. What is less routine is the scale and consistency of global currency returns now being generated.

A Goldman Sachs equally-weighted basket long the Brazilian real (BRL), South African rand (ZAR), and Mexican peso (MXN) has returned approximately 20% year-to-date in 2026. Separately, emerging-market carry broadly climbed 1.3% in the first months of the year, extending a 2025 run that saw certain currencies — including the Egyptian pound and Nigerian naira — rank among the best-performing carry trades globally.

The backdrop has rarely been more accommodating. The U.S. Dollar Index fell more than 9.6% across 2025, removing a key headwind that historically compresses carry returns. Foreign exchange volatility remains suppressed, lowering the cost of holding leveraged positions and reducing the probability of sharp reversal.

Goldman Sachs, in a July 2026 research note, declared that carry trades face conditions that are the "most compelling in more than two decades" — more specifically, the best environment for Group-of-Ten carry since approximately 2000. The bank favors funding positions using the Japanese yen (JPY), Swiss franc (CHF), and euro (EUR), deploying proceeds into higher-yielding developed and emerging-market assets.

The Yen as Funding Currency

No currency defines current Wall Street trading dynamics in the carry space more than the Japanese yen. JPY touched its weakest level in nearly 40 years, breaching 162 per dollar on June 30, 2026 — a move that erased roughly $72.5 billion in Bank of Japan currency intervention deployed earlier in the year.

The interest-rate differential driving this trade remains stark. Japanese yen borrowing costs stand at approximately 0.75% following the Bank of Japan's incremental tightening campaign, against a U.S. federal funds rate of 3.50% to 3.75%, yielding an annualized carry income near 300 basis points on the USD/JPY corridor alone. The BoJ raised its benchmark to 1.0% in June 2026, a move that generated brief volatility but did not structurally alter the attractiveness of JPY as a funding vehicle at current levels.

Goldman Sachs projects USD/JPY at 162 within three months, 163 in six, and 165 within one year — a sustained depreciation path that, if realized, would add currency appreciation gains atop interest-rate income for investors positioned long the dollar against yen.

Emerging Markets and the Rate Differential Advantage

Beyond Latin America, carry desks have expanded coverage into sub-Saharan Africa and Commonwealth of Independent States economies, where rate differentials frequently exceed those of established emerging market benchmarks. BNY Mellon has flagged broadening institutional interest in these frontier corridors, noting that the strategy's reach is extending well beyond traditional EM playbooks.

Market Reaction and Volatility Risk

The signal that carries trades are running hot is embedded in cross-asset volatility readings. Low implied volatility across forex market trends — a structural feature of the current cycle — compresses the effective cost of carry positions and extends the window during which the strategy can generate excess returns. Historically, the greatest threat to carry trades is not a gradual normalization of rate differentials but a sharp, disorderly volatility spike that forces simultaneous unwinding across leveraged portfolios.

Both the Bank for International Settlements (BIS) and the International Monetary Fund (IMF) have flagged yen carry trade exposure as a potential systemic-risk node. An abrupt unwinding — triggered by a rapid yen appreciation, a BOJ rate shock, or a sudden deterioration in global risk sentiment — could cascade through equity markets, Treasury markets, and dollar liquidity simultaneously.

Analysts note, however, that yen carry exposure is meaningfully smaller in absolute terms today than at its 2022-2023 peak, suggesting that a disorderly unwind, while possible, is less likely to reach systemic threshold without a significant catalyst.

What Comes Next

The Federal Reserve is expected to reduce rates toward 3.00% to 3.25% over the coming quarters, which will compress, though not eliminate, the USD/JPY differential. Analysts forecast the pair settling near 140 to 145 by year-end 2026 — still supportive of carry income but implying a narrowing window before structural conditions shift.

For global currency returns in emerging markets, the outlook hinges on whether commodity prices and domestic growth dynamics in Brazil, South Africa, and Mexico sustain the risk premium that justifies current positioning. As long as forex market trends remain characterized by low volatility and wide cross-currency spreads, carry trade strategy is expected to remain among the most actively pursued expressions of conviction in institutional foreign-exchange portfolios.

Outlook

The carry trade's return to prominence reflects a structural alignment of low volatility, persistent rate differentials, and a weakened dollar that market participants say has not been seen since the early 2000s. With Goldman Sachs, JPMorgan, and BNY Mellon all expanding exposure, Wall Street trading desks are treating the current environment as a durable regime, not a cyclical trade — though the BIS and IMF warnings about systemic unwind risk underscore the asymmetry embedded in any leveraged carry position. The next key inflection points are Federal Reserve rate decisions, Bank of Japan policy moves, and the trajectory of global volatility regimes in the third quarter of 2026.

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