The Carry Trade Is Back in Vogue After Colombia Peso Rallies 10%

  • Foreign investors increased peso bond holdings to record
  • The central bank has raised its key rate to a seven-year high

After fleeing Colombia in droves last year, carry-trade investors are now piling back in.

They’re being lured by the nation’s 7 percent benchmark rate -- the highest among major countries in Latin America after Brazil -- and a soaring peso. And the trade is paying off handsomely. Investors who buy riskier assets with money borrowed from countries with lower rates have reaped returns of 11.2 percent in Colombia over the past three months. That’s almost three times the emerging-market average.

Colombia is regaining its status as a carry-trade destination as the central bank boosts rates to contain inflation and after a rebound in oil prices helped spark an 9.7 percent surge in the peso since Feb. 19. Foreign investors increased holdings of the nation’s local debt to a record 19.1 percent in April after slashing them in January. Colombia, which depends on crude for about 40 percent of its export revenue, is also proving an alternative to the likes of Brazil, which boast high rates and a strengthening currency but are also plagued by political tumult, according to Aberdeen Asset Management.

“In countries where you still have high yields, you have quite a bit of political problems and volatility such as Brazil, Turkey and South Africa,” said Viktor Szabo, a money manager who helps oversee $11 billion of emerging-market debt at Aberdeen in London. “From that perspective, Colombia is relatively safe.”

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