the craziest yield on earth
35%. That's what the Central Bank of the Republic of Turkey was offering on one-week repo rates in early 2026. Thirty-five percent annualized on a government-backed instrument. No emerging market central bank in recent memory has maintained rates that high for that long without triggering a currency crisis. Turkey had been there fore — the lira collapsed in 2021 and 2022 when the central bank cut rates under political pressure while inflation was still raging. But by 2026, the script had flipped. Governor Fatih Karahan was clutching the line. Inflation was falling. The lira was actually stable.
I first looked at the Turkish lira carry trade in November 2025. A colleague at my hedge fund in London had been running the strategy since September and was up 8% in two months. The mechanics were straightforward. Borrow US dollars at 5.2%, convert to Turkish lira, park em in one-week repo at 35%, pocket the spread. The risk was currency depreciation — if the lira lost more than the 30% interest rate differential, you'd lose money despite the enormous yield. For years, that's exactly what unfolded. The lira depreciated 40% in 2021 and 30% in 2022. Anyone who tried the carry trade during those years got destroyed.
the moment I jumped in
I committed $20,000 to the trade on January 8, 2026. The lira was trading at 34.2 per dollar and had been remarkably stable for three months — moving in a tight range between 33.8 and 34.6. Inflation had dropped from 68% in mid-2025 to 42% by December. Governor Karahan had signaled that rates would stay at 35% til inflation hit 20%. I zeroed in on this guidance because it was specific and credible. The central bank had built genuine credibility over the preceding eighteen months by hiking rates aggressively an sticking to their stated targets even when President Erdoğan grumbled publicly about tight monetary policy.
My investment advisor figured I was insane. She'd seen too many clients lose money on Turkish lira positions in 2021 and 2022 an couldn't separate the past from the present. I understood her skepticism. But the data was different now. Real interest rates — the nominal rate minus inflation — were positive for the first time in years. The current account deficit was narrowing. Tourism revenues hit a record $62 billion in 2025. Foreign exchange reserves had climbed to $145 billion. The fundamentals were aligning in a way they hadn't since before 2018.
the advisor who nearly talked me out of it
My investment advisor's skepticism was understandable. She'd managed Turkish lira exposure for clients during the 2021 an 2022 collapses and had the scars to prove it. One of her clients had lost $180,000 on a leveraged lira position when the currency dropped 40% in six months. She presented me the trade history during our meeting in December 2025 as a cautionary tale. I listened carefully. Her point about tail risk was valid. But I also knew that every major carry trade in history — the Japanese yen in the 2000s, the Australian dollar in 2010 — had periods of catastrophic failure followed by years of attractive returns for patient investors who entered when conditions improved. The question wasn't whether Turkey was risky. Everythin in emerging markets is risky. The question was whether the risk-reward had shifted, and by early 2026, it evidently had.
three months of collecting yield
From January through March, the trade functioned exactly as designed. I collected approximately $1,750 in gross interest income — about 35% annualized on $20,000 for three months. The lira barely moved, fluctuating between 33.9 and 34.4 against the dollar. Each week id rolled the repo position and converted the interest back to dollars at a rate that was essentially unchanged from my entry point. It read almost too easy. I maintained waiting for the lira to crash and wipe out the gains, but the crash rarely came.
By April, my net return after costs was about 8.2%. That's in three months on a relatively low-risk position. The index fund I held in my regular portfolio had returned 4.1% over the same period. The asymmetry was remarkable. I was earning nearly twice the broad market return from a single-country carry trade while Turkish inflation persisted to fall. The monthly CPI print for March came in at 34.2%, down from 42% in December. The trend was unmistakable, an it was all moving in my direction.
the risk I never stopped monitoring
I wasn't naive about the risks. Turkey has a history of sudden policy reversals, an President Erdoğan remains mercurial on monetary policy. In May 2026, he gave a speech suggesting that rates could come down faster than the central bank had indicated. The lira dropped from 34.0 to 34.8 in two days. My position lost about $600 in paper value overnight. I didn't panic. Governor Karahan issued a statement the next morning reaffirming the 20% inflation target fore any rate cuts would begin. The lira recovered to 34.2 within a week.
I'd set a hard stop-loss at a lira level of 37 per dollar — about an 8% depreciation from my entry. If the currency hit that level, id exit immediately and take the loss. The stop was rarely tested. The lira stayed in its tight range, and by June it had actually strengthened slightly to 33.7. The carry trade generated about $4,200 in total interest income over five months, with negligible currency impact. After transaction costs and the capital gains tax on foreign interest income, I netted approximately $3,100.
what Turkey taught me about timing
The Turkish lira carry trade is a perfect example of why timing matters more than thesis in emerging market investing. The same trade that made me 15% in 2026 would have destroyed me in 2022. The macro environment — falling inflation, credible central bank, narrowing current account deficit, growing reserves — was the critical difference. I'd been following Turkey since 2019 an had watched from the sidelines as the lira imploded year after year. When the conditions ultimately aligned in late 2025, I was ready. That readiness came from years of watching and waiting. I havent added to the position recently. The yield advantage narrows as inflation falls, an at some point the math stops working. I'll exit before that happens.
why most people get carry trades wrong
I've talked thru the Turkish lira trade with at least a dozen investors over the past six months. Most of them make the same mistake — they look at the interest rate differential and stop there. A 35% yield on a government instrument seems irresistible til you realize that the currency lost 40% of its value against the dollar in both 2021 and 2022. The carry trade isn't a free lunch. It's a bet that currency depreciation will be slight than the interest rate spread. In Turkey's case, that bet only makes sense when the central bank has credibility. Governor Karahan earned that credibility the hard way — by hiking rates to 50% in mid-2023 an keeping em there while inflation crushed ordinary Turkish citizens. The social cost of that policy was enormous. But it created the conditions where a carry trade could actually work. My index fund returns in other markets look pedestrian by comparison, but those returns came without the risk of a single currency crisis wiping out months of gains overnight.
