Bessent’s Treasury Move Is Fueling the Carry Trade. Emerging Markets Are Preparing for a ‘Wall of Money.’

Emerging markets could be poised for a major influx of investor cash as a weaker U.S. dollar and changes in the Treasury market make high-yielding currencies increasingly attractive, with Brazil, Turkey and Colombia emerging as some of Wall Street's favored destinations.

The shift follows the U.S. Treasury's decision in August to sharply increase its purchases of longer-dated government debt, a move that analysts say has reduced one of the biggest risks facing the popular carry trade.

Treasury Secretary Scott Bessent's department announced on August 19 that it would at least double the maximum size of liquidity-support buybacks for Treasury securities in the 10-to-20-year and 20-to-30-year maturity ranges.

The maximum will rise from $2 billion to at least $4 billion per operation beginning September 9 and remain in effect through November 4. The Treasury said the increase was designed to provide greater liquidity in longer-dated securities.

The decision has had consequences well beyond the U.S. bond market. Emerging markets are likely to receive a "wall of money" as investors search for higher returns, Robin Brooks, a senior fellow at the Brookings Institution, wrote last week, according to CNBC.

At the center of the trade is a strategy known as the carry trade. Investors borrow in a currency where interest rates are relatively low and put that money into currencies or assets offering substantially higher yields. The strategy can be highly profitable when exchange rates are stable, but losses can mount rapidly when the funding currency suddenly strengthens or borrowing costs jump.

The Treasury's intervention has helped reduce that risk while putting pressure on the dollar, according to analysts cited by CNBC. Evidence that money is already moving is beginning to appear.

Global emerging-market bond funds attracted $967 million during the week ending Wednesday, an increase of roughly 15% from the previous week, according to TD Securities data cited by CNBC. That came even as overall bond-fund inflows slowed.

Currencies have also responded. Since the Treasury buyback announcement, the South Korean won strengthened 2.83% against the dollar, while the Brazilian real gained 0.64% and the South African rand rose 0.59%, according to LSEG data cited in the report.

Peter Kinsella, global head of FX strategy at Union Bancaire Privée, told CNBC that the announcement suggested the U.S. could pursue policies resembling "financial repression," contributing to dollar weakness and benefiting higher-yielding currencies.

Among emerging markets, Brazil and Turkey stand out. Brazil's benchmark interest rate is currently 14%, while 12-month inflation was 4.2% as of mid-August, leaving the country with one of the highest inflation-adjusted interest rates among major economies.

Turkey offers even more eye-catching nominal rates. Its central bank kept its one-week repo rate at 37% in July, although annual inflation remained extremely high at 31.75%. Colombia has also become a favorite.

Wee Khoon Chong, BNY's Asia-Pacific macro strategist, told CNBC that Colombia has been "very popular" among carry traders this year. The Colombian peso was up about 20% year to date through Friday, while the country's benchmark COLCAP stock index had gained roughly the same amount.

Asia, however, may not participate equally in the boom. Eric Robertson, chief strategist at Standard Chartered Bank, told CNBC's "Squawk Box Asia" that Asian currencies are likely to continue underperforming other emerging-market currencies because their implied yields are generally lower. India's key interest rate, for example, stands at 5.25%, far below Brazil's 14%.