Neuberger Berman Spurns Yen for Swiss Franc as Top Carry Funder

(Bloomberg) — Neuberger Berman has stood by a tried-and-true carry-trade strategy, yet the asset manager is now making a significant change: It’s funding positions using the beleaguered Swiss franc rather than the Japanese yen.

Traders are becoming wary of shorting the yen after the Bank of Japan ended its negative rate policy earlier this month and raised rates for the first time since 2007. Policymakers are also threatening intervention to support the currency, further curbing the yen’s potential losses.

With the negative rates that have been a staple in Japan, the yen has long been a funder of carry trades, where low-yielding currencies are borrowed to buy securities denominated in higher-yielding ones. That bet returned 35% last year when the yen was used to buy a basket of Colombian, Chilean and Mexican pesos.

Yen-funded carry trades “could continue, but the yen is already deeply undervalued, and market short positions are probably crowded despite the BOJ’s much awaited first step toward monetary policy normalization,” said Ugo Lancioni, Neuberger Berman’s head of global currency. “Currently, we favor funding positive carry trades with the franc.” 

Read more: Yen’s Carry-Trade Reign in Flux as BOJ Hints at Policy Shift

In pivoting to short the franc instead, Lancioni joins a growing chorus of traders that see more pain ahead for the currency after the Swiss National Bank, or SNB, delivered a surprise interest-rate cut last week.

So far this year, shorting the franc and buying that basket of Mexican, Chilean, and Colombian pesos has returned 6.8%, on par with the yen-funded trade, which has returned 6.7%, according to data compiled by Bloomberg.

The franc has lost about 2% against the dollar since the SNB’s rate cut, while the yen is down more than 1% since the BOJ’s rate hike.

Franc ‘Overvalued’

“The SNB has become the first major central bank to cut rates, as its fight against inflation has proven effective, bringing inflation back below 2%,” Lancioni said. “Despite recent depreciation, the Swiss franc remains one of the most overvalued currencies in real terms. With inflation decreasing rapidly and lower inflation projections, there is room for this trend to continue.” 

Read more: Swiss Franc to Stay Under Pressure on SNB Cut, Analysts Say

On the other side of the trade, the Mexican peso and British pound are likely to remain beneficiaries of the demand for carry trades, according to Lancioni — even if sterling could struggle after the Bank of England’s recent dovish pivot. 

In Mexico particularly, Neuberger Berman remains positive and overweight the peso and local bonds even as Banco de Mexico also begins easing policy. “Despite the 25 basis-point cut, rates at 11% remain very attractive,” Lancioni said.

The peso has rallied roughly 0.8% versus the dollar since the central bank’s latest move on March 21. The pound is down about 1% since the Bank of England telegraphed a more dovish policy stance the same day.

Key to the success of the carry trade is a low volatility environment, since the strategy — which often amounts to methodically picking up small pieces of yield accumulated over time — can be shattered by a fast-moving exchange rate. One gauge of currency volatility now hovers above four-year lows. 

Nonetheless, at this stage in the cycle, there’s danger in piling on to risk-on bets underpinned by low-volatility environments. 

“Periods of spikes in volatility remain very likely and therefore we prefer a tactical stance with a bias to add carry on dips where macro fundamentals remain supportive,” Lancioni said. 

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