The emerging market carry trade is back on, helping to chase higher the very assets that were sold off last year amid concerns U.S. interest rates were set to rise.
"The U.S. yields haven't actually risen," said Nizam Idris, head of fixed income and foreign-exchange strategy at Macquarie. "That environment encourages funds to look for yields," which can typically be found in the very current account deficit countries that were sold off last year, he added.
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A carry trade is when investors borrow in a low-yielding currency, such as the yen and sometimes the U.S. dollar, to fund investments in higher yielding assets somewhere else. A weakening currency is central to the carry trade since it means that investors have less to repay when they cash out of the trade.
"Until U.S. yields start to rise, this trading strategy could be profitable," Idris said, noting the beneficiaries include the Australian dollar and the Turkish lira as well as high-yielding bonds, like the new offerings from one-time financial market pariah Greece. This week, Greece sold its first international bond issue in four years, priced at an initial yield of 5-5.25 percent.
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Last year, emerging market assets sold off after the U.S. Federal Reserve first broached its plans to begin tapering its asset purchases, as expectations that would cause interest rates to rise spurred an outflow of funds.
But Idris noted U.S. interest rates haven't actually risen on either the long or short end. The U.S. 10-year Treasury yield is at 2.67 percent, versus around 3.0 percent at the beginning of the year.
U.S. economic data have been largely tepid lately, helping to keep rates relatively low.
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"If the U.S. stays in this below-trend equilibrium for a while longer and the short-term of the yield curve in the U.S. is well-anchored, then carry ought to perform well," Nicholas Ferres, investment director at Eastspring Investments, told CNBC. "I suspect that is actually helping emerging markets which have been beaten up over the last six to 12 months and are starting to bounce back."
Others noted that the Fed isn't the only central bank that can spur the carry trade.
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"The more dovish tone of the ECB is compensating somewhat for expectations of the Fed possibly raising rates a few months earlier than the market had in mind at the beginning of the year," Credit Agricole said in a note this week, adding U.S. data also suggest any rise in yields in the U.S. would likely only be gradual.
"Against such a backdrop, the carry-attractiveness of high-yielders could remain in focus," it said. It expects Russia's ruble, Turkey's lira and South Africa's rand to benefit from the trade short term, while it may also be a good time to accumulate China's yuan and possibly even Mexico's peso.
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Societe Generale expects carry trades will get a fillip from strong Japanese flows, especially for the Australian and New Zealand dollars and South Africa's rand, reinforced by expectations the Bank of Japan (BOJ) will ease policy further in coming months.
"As and when the BOJ eases, new portfolio flows out of Japan are likely to have a positive impact on the U.S. dollar and some select emerging market currencies, while in Europe they will benefit bonds in the soft core as well as the periphery," the bank said in an April 1 note.
Japanese retail investors are heavily positioned in emerging market assets, it said, noting that of 23.7 billion rand of bonds sold to foreigners in 2013, 44 percent was held by Japanese retail investors.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1