Carry Trade Reversal

Definition ∞ A carry trade reversal is a market event where the profitability of a carry trade strategy diminishes or reverses its direction. This strategy typically involves borrowing an asset with a low interest rate to invest in another asset offering a higher yield. The reversal is often caused by shifts in interest rate differentials or an increase in market instability.
Context ∞ In cryptocurrency markets, carry trades often involve stablecoins or various yield-generating decentralized finance protocols. A reversal can be triggered by sudden changes in lending rates on these platforms or by broader macroeconomic shifts, such as central bank policy adjustments. News regarding interest rate fluctuations or market liquidity concerns can indicate potential carry trade reversals, affecting arbitrageurs and overall market dynamics.