Emerging Market Arbitrage Trades Extend Winning Streak to Seven Consecutive Quarters

Emerging market arbitrage trades have recorded positive returns for seven consecutive quarters, marking the longest winning streak since 2008. According to Bloomberg's eight major emerging market currency arbitrage indices, this trade has accumulated a return of approximately 22% since the end of 2024. In contrast, U.S. Treasury bonds returned 5.9%, emerging market sovereign dollar bonds 14%, and emerging market corporate bonds 10%. Cathy Hepworth, head of PGIM's $1.5 trillion emerging market debt team, stated that 'arbitrage, arbitrage, arbitrage' is the most reliable theme.

The practice of arbitrage trading involves borrowing money in low-interest currencies like U.S. dollars, Japanese yen, or euros to convert into high-interest currencies like the Turkish lira and earn the interest spread. The interest returns in Turkey can exceed 40%. However, what has truly doubled the returns is the exchange rate, as the U.S. dollar has weakened against emerging market currencies outside Asia.

Thierry Larose, a portfolio manager at Swiss asset management firm Vontobel, stated that 'the threshold for disorderly liquidations is higher than we thought a few weeks ago.' Despite the recent joint market interventions by the U.S. and Japan, arbitrage traders have not been deterred, with many continuing to engage in the trade.