Global investors are facing a conundrum; developed market bonds have never been pricier while central bank policy has never been looser. Easy monetary conditions are driving gains in equities and supporting bonds. But with the IIF noting recently that USD $10 tn worth of the world’s (i.e. developed market) government securities are now offering negative rates, the search for yield is becoming more pronounced.
In the FX space, this has driven renewed interest in the carry trade. The main beneficiaries have been
higher-yielding EM currencies rather than the traditional G-10 high yielders and these currencies may be the most exposed to a Fed-induced correction in the trade.