How Global Neutral Rates Impact Currency Carry Strategies?
Market practitioners often rely on experience-based wisdom to navigate currency markets, and one such widely held belief is that low dispersion in global bond yields signals weak future returns for carry trades (and high dispersion implies high future carry returns). While this intuition makes sense—when yield differentials are compressed, the incentive to exploit them diminishes—a recent academic study provides a solid theoretical foundation for this idea. The research not only confirms this observation with rigorous empirical analysis but also explains the underlying financial mechanisms that drive the relationship. By quantifying the effect and presenting clear visualizations, the study transforms an intuitive market rule of thumb into a well-grounded principle backed by data.