In a carry trade, investors borrow in countries like the US, where short-term borrowing costs are low. They would then purchase higher yielding assets like Malaysian Government Securities (MGS) to profit from the positive yield difference.
This strategy relies on the stability of assets’ prices and exchange rates, since excessive movements can easily wipe out the profits of a carry trader.
The Edge analyzed several factors which seems to be working in favour of the carry trade in Malaysia.
‘Fear’ Index at 2014 low
To begin with, volatility in global financial markets is expected to be low in the coming months. This can be seen by the S&P 500 Vix index (Vix).
The Vix, which is also known as the ‘fear index’, is a widely-used indicator of the expectations of volatility. The higher the number, the more volatile or unstable investors expect the markets to be.