BofA Flags Turkish Lira as Top Carry Trade, Sees Nearly 10% Return Potential

Summary:

Bank of America strategists say the Turkish lira is their preferred carry trade among emerging market currencies in EEMEA, citing high interest rates, tight monetary policy and seasonal improvements in the current account. They estimate potential returns close to 10%, while warning of crowding risks.

The Turkish lira is the most attractive carry trade opportunity in Eastern Europe, the Middle East and Africa (EEMEA), according to strategists at Bank of America, who see scope for returns approaching 10%.

In a recent note, BofA said borrowing in US dollars and investing in lira-denominated assets has gained popularity this year, as investors grow more confident in Türkiye’s efforts to rein in inflation and return to more orthodox economic policies.

High Carry and Seasonal Support

BofA strategists, including Mikhail Liluashvili, recommended buying lira forwards, pointing to strong carry, tight monetary conditions and seasonal support from summer tourism revenues, which typically improve Türkiye’s current account balance.

“We are long TRY due to high carry, positive current account seasonality and tight monetary conditions,” the strategists said.

Carry trades linked to Turkish assets had largely fallen out of favour in previous years following unorthodox policy measures. However, the sharp interest rate hikes that followed the policy pivot back toward conventional economic management have helped restore investor appetite.

Data compiled by Bloomberg show that the lira has delivered a 13% gain over the past six months, making it the best-performing carry trade among emerging market currencies over that period.

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Crowded Trade Risk and Alternatives

BofA cautioned that positioning in the lira has become increasingly crowded, which could amplify volatility in the event of an unexpected market shock. For some investors, Turkish government bonds may offer a more attractive risk-adjusted alternative, the bank said.

Citi and Morgan Stanley Also Constructive

Separately, strategists at Citigroup said Turkish assets are approaching what they described as a “renaissance moment.” Analysts led by Luis Costa noted that the outlook for the lira and local bonds will depend primarily on the central bank’s ability to re-anchor inflation expectations.

Meanwhile, Morgan Stanley has also maintained a positive stance on the lira, highlighting Türkiye’s high interest rates as a key draw for global investors funding positions in lower-yielding currencies.

Analysts at both banks said the lira remains well positioned into 2026, provided policy discipline is maintained and inflation continues to trend lower.

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