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Is the Carry Trade a Diversifying Strategy?

Only if you have zero equity exposure.

Nicolas Rabener
10 min read
17 Oct 2022

SUMMARY

  • The carry trade was positive across most asset classes in YTD 2022
  • The correlations to the S&P 500 were low historically
  • However, the carry trade crashed when stocks crashed, ie provided limited diversification benefits

INTRODUCTION

After a few years in unchartered territories, most bonds have normalized by showing positive yields again. Naturally, this implies that almost all bonds will have lost in value this year. Although painful, monetary tightening is required to fight inflation, and it increases the expected return of fixed-income securities, at least in nominal terms. 

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