Resource: The Rise of Carry
A carry regime, driven by carry trades, transforms financial assets into money-like assets. This reduces their yields, decreases volatility, and makes them appear less risky.
This transformation is largely due to support from governments and central banks. Without this backing, it would be more difficult for investors to perceive these assets as similar to money-like assets.
Why is this important: It explains why assets that should be considered risky seem less risky to investors. This also encourages the formation of carry bubbles. If investors recognized the inherent risk of these assets, it would be harder to attract buyers. However, because these assets appear to be as safe as money, demand increases until the bubble eventually bursts.
Where do we use this knowledge: This serves as a reminder that what seems less risky today may become highly risky in a different environment, especially during a crisis.