Fed hike squeezes Latin America’s carry cushion

By Samuel Malkun

As the Federal Reserve pivots to tighter policy, Latin American nations’ yield advantage over dollar-denominated debt is shrinking – with implications for local bond markets at moment of sustained inflationary pressure.

As our chart shows, Latin American “carry” has been waning across the region in 2026 (except for Colombia, which has been hiking rates steadily). Brazil is notable for having the biggest spread over US rates following the 2024-25 hiking cycle by the @Banco Central do Brasil – but that spread over the Fed’s upper bound has narrowed from 11.25 percentage points last December to 9.75 percentage points today.

As a result of these narrowing spreads, foreign investors’ appetite for the region’s securities faded; Inflows to Latin American bonds have shrivelled since the Fed’s September hike. Currencies are weaker too – especially #Mexico’s peso, which is down about 7% since Sept. 16. (Only Brazil’s real has appreciated lately amid anticipation of a Bolsonaro government.)

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