Emerging Markets at Risk From Carry Trade Unwinding, BofA Says

Emerging-market assets are at risk as the tapering of the Federal Reserve’s stimulus program will probably trigger a reversal of $2 trillion in carry trades, according to strategists at Bank of America Merrill Lynch.

Carry trades, where investors borrow in a country with low interest rates to fund purchases of higher-yielding assets elsewhere, helped developing nations raise foreign-exchange reserves by $2.7 trillion since the end of the third quarter of 2008, Hong Kong-based Ajay Singh Kapur and Ritesh Samadhiya at BofA wrote in a research report today. The capital inflows spurred economic growth and inflated prices, particularly those of bonds and property, they said.