Citigroup Closes Carry Basket on Developing Currencies Amid US Yield Surge

Citigroup Inc. has closed its carry basket that included long positions in the South African rand, Mexican and Colombian pesos, and Turkish lira against the Canadian dollar and Swiss franc. This move followed a strong US Purchasing Managers' Index (PMI) report, a weak 5-year Treasury auction, and geopolitical headlines. The surge in US Treasury yields has reached the highest levels in decades, threatening the carry trades that emerging-market investors relied on this year.

The carry trade, which profits from interest rate differentials, has been a popular strategy funded by the US dollar since 2008. Analysts note that carry trades typically perform poorly during periods of high volatility and high crowding. Concerns about global inflation fueled by higher oil prices are forcing investors to rethink their strategies.

The Federal Reserve has signaled no rate cuts while oil price drops affect inflation and currency strength across Latin America.