Treasury Buybacks Weigh on Dollar, Boost EM Carry
As of Tuesday, September 1, 2026, analysts see a potential surge in emerging market capital inflows driven by a weaker dollar and the allure of carry trades. The U.S. Treasury’s bond buyback program, announced earlier this year, has pressured the greenback, making higher-yielding EM assets more attractive. According to a note from Goldman Sachs, the dollar index has slipped 3.2% since the buyback plan was unveiled in May, creating a favorable backdrop for carry strategies.
Why Carry Trades Favor These Markets
Carry trades involve borrowing in low-yield currencies like the dollar and investing in higher-yield EM bonds. With the Fed holding rates at 4.5% and Treasury buybacks pushing yields lower, the interest rate differential widens. For example, Brazil’s 10-year bond yields 11.8%, while Mexico’s offers 9.4%, versus 4.9% for the 10-year Treasury. This spread, coupled with a stable EM currency environment, has prompted funds like BlackRock to increase EM allocations by 1.5% in August.
Which Markets Are Poised for the Most Inflows
Analysts point to India, Indonesia, and South Africa as top beneficiaries. India’s rupee has appreciated 1.2% in August, and its foreign exchange reserves hit a record $670 billion, providing cushion against volatility. Indonesia’s rupiah has been supported by strong commodity exports, while South Africa’s rand benefits from higher gold prices. A JPMorgan survey on August 28 showed that 62% of global fund managers plan to increase EM debt exposure by year-end.
Risks That Could Deral the Wall of Money
However, the carry trade is not without risks. A sudden Fed rate hike or a spike in U.S. inflation could reverse the dollar’s decline, triggering capital outflows. The recent rise in oil prices, up 8% in August to $82 per barrel, could hurt oil-importing EMs like India and Turkey. Additionally, political instability in some EM nations, such as the upcoming elections in Brazil in October, may cause investors to pause.
What to Watch Next
Keep an eye on the Federal Reserve’s September 17 meeting for any hawkish surprises, and monitor the dollar index’s movement relative to its 200-day moving average. A break below 93.5 could signal further EM gains, while a rebound above 96 would likely stall inflows. Also, watch Brazil’s central bank decision on September 21, as a rate cut could test the carry appeal.
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