Crowded carry trades flash warning lights

Some of 2025’s star emerging-market trades are starting to make professional investors nervous. Brazilian real carry trades have delivered returns of around 30% this year, while a basket of high-yield Latin American currencies has outperformed most major FX pairs. Now money managers from Wells Fargo to Fidelity and Lazard say valuations look stretched and positioning has become crowded, especially in less liquid markets.citeturn1view0

Where risks are building

Strategists point to three pressure points. First, the Brazilian real and Mexican peso, which have attracted huge inflows thanks to high real yields and relatively orthodox central banks. Second, frontier African markets, where thin liquidity could make exits painful if global volatility spikes. Third, Asian tech-linked assets, which already suffered a sharp selloff in early November — the worst since April — reminding traders how quickly sentiment can turn.citeturn1view0turn0search28

Why it matters for FX and rates

Carry trades thrive in calm markets with predictable central banks. Today the backdrop is changing: Fed hawks are pushing back against another December rate cut, US yields remain elevated and the ECB and BoE have signalled that the easy phase of policy easing is ending. If global bond yields rise again or risk appetite sours, high-yield EM FX is usually the first place investors cut exposure, amplifying moves in local rates and credit.citeturn0search7turn0search13turn0search22

What traders are watching

Over the next few weeks, professionals will watch for three signals: a pick-up in implied FX volatility, a reversal of inflows into Latin American local-currency debt and any fresh stress in thinner African and Asian markets. For now, the message from big EM desks is not to panic, but to recognise that the easy carry money has likely been made — and to make sure positions can survive a bumpier end to 2025.