A carry trade is a strategy where investors borrow money in a country with low interest rates and invest it somewhere offering higher returns.
For years, Japan has been the favorite source of cheap money. Investors borrow yen, convert it into US dollars or other currencies, and buy bonds or other assets with higher yields. The Swiss franc is another popular option.
The goal is simple: keep the difference between what you pay to borrow and what you earn investing.
Carry trades help move trillions of dollars’ worth of money around the world. When lots of investors pile into the same trade, it can boost asset prices. That borrowed cash often ends up in:
You don't need to be a hedge fund to get caught by carry-trade logic. Before the 2008 financial crisis, many Icelanders borrowed in low interest-rate currencies like yen or Swiss franc to buy homes even though their salaries were paid in króna. When króna plunged, their savings vanished, housing market crashed, and debts ballooned.
The carry trade works best when interest rates and currencies stay stable. If you’ve borrowed in cheap yen and the currency suddenly strengthens sharply:
That's exactly what happened in 2024 when a surprise Bank of Japan rate hike sparked a carry-trade unwind. As traders scrambled to close their positions, Japan's Nikkei index plunged 12%, its biggest one-day drop since 1987.