Published on: 25 March 2025
Author: Gianni Parisi, Andrea Landini
This paper examines carry trade strategies, focusing on market reactions to interest rate changes and currency interventions. It explores how carry trades leverage interest rate differentials, with investors borrowing in low-yield currencies to invest in higher-return assets. The study reviews types of carry trades, such as currency and asset-based, and discusses risks like currency, interest rate, and liquidity. The Dollar-Yen carry trade, affected by Bank of Japan interventions, illustrates the strategy's volatility.
Published on: 7th May 2025
This white paper examines how rising volatility in the U.S. Treasury market, triggered by the Federal Reserve’s 2024 easing cycle, affects the stability of the Treasury basis trade, a leveraged arbitrage strategy involving cash bonds and futures. We explain the mechanics of the trade, its reliance on repo financing, and why it becomes vulnerable during periods of market stress. Using a dynamic stochastic model, we analyze optimal investor behavior under volatility-normalized dynamics and explore how policy tools, such as Fed backstop facilities, aim to prevent disorderly unwinds and safeguard financial stability.