The carry trade – borrowing where interest rates are low and investing where they are high – is posting its best returns in three years in some cases. Rising oil prices triggered by the Iran war are helping propel the approach, even as the conflict whipsaws stocks and bonds, wiping out Treasuries’ gains for 2026.
“The main reason the foreign-exchange carry trade has been holding up so well is because of commodities,” said Leah Traub, a portfolio manager and head of the currency team at Lord Abbett & Co, which manages about $248 billion. Certain high-carry currencies “benefit from the rise in oil and gas prices.”
Traders are borrowing in countries more exposed to higher energy costs, such as Japan, and investing in economies benefiting from the rally in energy. They often pair commodity exporters with other high yielders to reduce the risk of relying on a single position.
One popular version borrows Japanese yen to buy a basket that includes the Brazilian real, Colombian peso and Turkish lira. It has returned more than 2% since the attacks on Iran began and over 6% this year — the strongest start since 2023 — according to data compiled by Bloomberg.
BloombergAcross global markets, commodities are playing an increasingly powerful role as the conflict pushes crude to its highest levels in years. The higher prices and relatively elevated interest rates in some economies are helping offset the volatility that typically erodes carry-trade returns.
In Brazil, the one-month carry-to-volatility ratio — a key gauge for the attractiveness of the strategy — remains elevated compared with peers. That’s leading Sao Paulo-based hedge fund Legacy Capital Gestora de Recursos Ltda. to invest in currencies such as the real with Brazil’s benchmark interest rate at 15%. The firm, which manages about $3 billion, has been funding those trades by shorting counter-cyclical, developed-market currencies.
“We’re sticking with our positions,” said co-founder and Chief Investment Officer Felipe Guerra.
Brazil, a preferred target of carry traders, continues to benefit from the country’s growing oil production and export revenues.
“I would not avoid well-paired carry trades in which I am long oil producers that are far from the conflict,” said Thierry Wizman at Macquarie Group in New York. “It is especially beneficial to Brazil, for example, that has increased oil output in recent years.”
BloombergSome investors argue that broader forces have also been supporting EM currencies, including relatively strong economic growth and interest rates that remain far above those in developed markets.
“Emerging markets more broadly have held up during the past year or so due to structural support such as high growth, monetary policy as well as broader dollar weakness,” said Anna Wu, cross-asset investment strategist at Van Eck Associates in Sydney.
The behavior of the yen — the world’s most widely used funding currency — has also played a role.
Traditionally a haven during geopolitical turmoil, it has failed to stage a sustained rally. With the Bank of Japan maintaining relatively accommodative policy, Japan’s low-rate environment continues to anchor its role as a preferred funding currency even amid elevated volatility.
War Duration
To be sure, a sharp rally in the yen — whether triggered by a rush into havens or policy intervention from Japanese authorities — could quickly wipe out returns.
“If the conflict escalates and triggers a global flight to safety, investors typically rush to buy back the yen to close carry trades,” said Noureldeen Al Hammoury, chief market strategist at Equiti Group in Dubai. “That can lead to violent yen appreciation and sharp market moves.”
