Turkey's 30% Trade: Everyone Wins — Until Someone Doesn't

Last year, one of the best trades in global markets required no stock-picking, no leverage and no genius. You bought Turkish lira, parked them in a money-market fund, and waited.

The average lira money-market fund returned 53% in 2025. Over the same period the lira lost about 18% of its value against the dollar. Net result: roughly +26% in dollar terms and close to 30% annualised for anyone who bought into the March 2025 panic. The year before, when money-market funds returned 61% in lira, the same trade made about 34% in dollars.

Meanwhile Turkish stocks, the “obvious” way to play a recovering economy, lost about 6% in dollar terms in 2025.

Chart 1: Three years, one winner: lira cash beat Turkish equities in dollar terms every year since 2024. — *Three years, one winner: lira cash beat Turkish equities in dollar terms every year since 2024.*

So here is the question every investor in this trade should be asking: if the trade is this good, who is paying for it — and what happens when they stop?

The answer is a game. Literally. Let’s play it.

The rules: you earn the rate, you lose the slide

The mechanics fit in one sentence: you earn the interest rate, you lose the depreciation, you keep the difference.

Turkey’s central bank (CBRT) runs a policy rate of 37% while inflation sits at 31.5%. Crucially, it lets the lira weaken only slowly about 1.5% a month this year even though prices are rising faster than that. That managed glide is the whole business model. As long as the lira falls more slowly than the interest you collect, you win.

It is not a secret. Foreign investors have piled an estimated $75 billion into high-yielding lira swaps and money-market funds, according to Bloomberg. That is a lot of money that can leave in a hurry.

The players

Every game needs players with conflicting incentives. This one has five.

Foreign carry traders want the yield and a lira that doesn’t break. Their weapon is speed: they can leave in days.
The central bank wants disinflation and reserves. Inflows deliver both — until they reverse.
The government wants growth and, eventually, an election win. Early elections are being floated for autumn 2027.
Turkish households want wages that keep up with prices. For now, they don’t get them.
Exporters want a weaker lira. In real terms they are getting a stronger one.

Game one: the stag hunt

Start with the carry traders. Each investor faces the same choice every morning: stay in, or get out.

What makes the choice interesting is that your payoff depends less on Turkey’s fundamentals than on what everyone else does.

Chart 2: Two stable outcomes. Which one the market sits in depends on beliefs, not on the balance of payments. — *Two stable outcomes. Which one the market sits in depends on beliefs, not on the balance of payments.*

If everyone stays, the carry keeps paying. If you leave early, you are safe in T-bills but miss out. If you stay while everyone else runs, the lira gaps lower within days and a year of carry can vanish in a week.

Game theorists call this a stag hunt. It has two stable outcomes: everyone stays and everyone wins, or everyone runs and the early leavers lose least. Neither is “correct”. The market lands in whichever one investors believe it will land in.

With payoffs like these, staying is rational only as long as you think roughly half the market will stay too. That is the key insight: the carry trade doesn’t end when the fundamentals turn. It ends when the belief flips.

We have watched it flip twice in eighteen months:

March 2025. The arrest of Istanbul mayor Ekrem İmamoğlu triggered the sharpest lira slide in four years and forced hedge funds to unwind.
March 2026. After the Iran war broke out on 28 February, almost $15 billion of carry money left within three weeks. Official reserves fell by a record $43 billion in a single month as the central bank sold dollars to hold the line.

Both times the firewall held, and both times the money came back within months. That is what keeps the “stay” equilibrium alive: investors have learned that the CBRT will defend the lira. The real question is how much firewall is left.

Game two: the countdown

The second game is played between the central bank and the calendar.

Tight money is painful and unpopular. Growth slowed to 2.3% in the second quarter, below expectations. Sooner or later, the political pressure to cut faster and let credit flow will grow — and it grows fastest before elections.

Every carry trader knows this, and it creates a problem game theorists call backward induction. If the game ends in, say, autumn 2027, nobody wants to hold the trade on the last day. So the smart money leaves a month earlier; anticipating that, others leave two months earlier. Taken to its logical end, the trade unravels long before the deadline.

The only thing that stops the unravelling is uncertainty. As long as nobody knows when the music stops, and the payout per round is fat enough, staying one more round is worth it.

That tells you what the CBRT’s real job is: keep the end date far away and blurry, and keep the payout per round attractive. The moment a hard deadline appears, a snap-election call, a governor under pressure, a sharp rate cut that looks politically dictated, expect the exit to be front-run by months, not days.

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The scoreboard: where things stand

Here is the state of play as of late September 2026.

Chart 3: The policy rate has stayed above inflation since autumn 2024. That gap is the carry trader's cushion. — *The policy rate has stayed above inflation since autumn 2024. That gap is the carry trader’s cushion.*

Policy rate: 37%, on hold for five straight meetings. The bank quietly tightened in March by pushing funding to 40% and only went back to 37% in late August. The September decision opened the door to an October cut, per Bloomberg.
Inflation: 31.5% in August, stuck in the low 30s all year. The CBRT now expects 28% by year-end, above its own 24% target, blaming energy prices.
The lira: a record ~48.8 per dollar. The dollar is up about 14% against it this year — far slower than prices are rising.
Reserves: about $185 billion gross; net reserves excluding swaps of $56 billion in mid-August, up $35 billion since the March low.
Oil: Brent back around $100 as the US–Iran conflict flares around the Strait of Hormuz. For a country that imports nearly all of its oil and gas, that is the biggest external risk.
Ratings: BB- / Ba3 / BB-, three notches below investment grade; Fitch on positive outlook since January.

Now put two of those numbers side by side: $75 billion of hot money against $56 billion of net reserves. The firewall is smaller than the pile of money it is meant to contain. That does not mean a crisis is coming. It means the stag hunt runs on confidence more than on cash.

Stocks: the trap in plain sight

If the carry is the smart money’s trade, the stock market has been the money illusion.

Chart 4: Nominal records, real stagnation: the BIST 100 in lira versus in dollars since the end of 2023. — *Nominal records, real stagnation: the BIST 100 in lira versus in dollars since the end of 2023.*

The BIST 100 has risen about 77% in lira since the end of 2023 and hit a record in May. In dollars it is up just 7%. Over the same period, a plain lira money-market fund nearly doubled in dollar terms.

Then came September. The regulator ordered the liquidation of 130 investment funds run by seven asset managers after investors pulled up to $1 billion in a single day. The funds 891 billion lira (about $18 billion) in assets and 353,000 investors had allegedly pumped thinly traded stocks. The index fell almost 6% in a day and is down about 8% this month.

It may get worse before it gets better. MSCI and S&P Dow Jones Indices have both warned that Turkey could be pushed toward frontier-market status, with MSCI’s deadline at its November review. A downgrade could force index-tracking funds to sell.

The flip side: at the start of the year the index traded at a 54% discount to emerging-market peers on price-to-book, and banks stand to gain most once rates finally fall. For patient equity investors, the entry point is getting interesting. So far, though, cash has simply paid better.

Who pays the bill?

Carry profits don’t come from nowhere. When a foreign investor earns 20% in dollars on Turkish cash, someone in Turkey sits on the other side of that transfer.

1. The central bank — and ultimately the taxpayer. To stop inflows from fuelling inflation, the CBRT soaks up the extra lira and pays close to the policy rate on it, while the dollars it receives earn about 4% in US Treasuries. As a rough rule of thumb, much of the carry trader’s profit is the mirror image of the central bank’s cost.

2. Exporters and factory workers. Over the past twelve months prices rose 31.5% while the dollar gained only about 18% against the lira. For a company paying lira wages and selling in dollars or euros, that is a double-digit cost squeeze in one year. Turkey’s textile and apparel workforce shrank from 1.25 million in 2022 to 950,000 in 2024, and more than 200 Turkish-owned textile factories now operate in Egypt instead.

3. Wage earners. The minimum wage, which roughly half of Turkish workers earn, rose 27% for 2026 — against inflation running above 30%. Another year of real pay cuts.

4. Borrowers and small businesses. Credit at 40-plus percent is a luxury most small firms cannot afford. The economy is still growing, but slowly, and by the central bank’s own reckoning output is below potential.

5. Local stock investors. Turkish savers who chased equities instead of cash have lagged badly in dollar terms — and 353,000 of them now have money frozen in liquidating funds.

The winners are just as clear: foreign carry traders, Turkish savers holding lira deposits (now 62% of all deposits), and the central bank’s disinflation programme, which leans on a stable lira to cool import prices.

That is the uncomfortable truth of the trade: the yield you collect is funded by Turkey’s manufacturers, workers and public balance sheet. Which is precisely why it cannot last forever.

Ankara’s options

The central bank has five levers. Each one has a price.

Hold at 37% for longer. Buys credibility and keeps the carry flowing. Price: more hot money piles up and the economy keeps slowing.
Resume gradual cuts, most likely in 100–150 basis-point steps from October. Price: every cut makes the lira less attractive — cut faster than inflation falls and the stag hunt tips.
Let the lira slide faster to relieve exporters. Price: higher import prices, slower disinflation, and a loud signal that the managed glide is over. This is the lever most likely to trigger a run.
Throw sand in the wheels. Limits or reserve requirements on short-term swaps with foreigners can make hot money less hot. The bank has tried this before and is weighing it again. Price: fewer inflows, slower reserve rebuilding.
Pull the emergency brake. Suspend cheap funding, push rates to 40% or higher, sell reserves — exactly what the CBRT did in March 2025 and March 2026. Price: it works, but every use burns tens of billions of dollars.

My read: expect a mix of option 2 and option 4, with option 5 on standby. Slow, careful cuts that keep inflation-adjusted rates clearly positive, plus quiet efforts to lengthen the maturity of foreign money. The lever Governor Karahan’s team will try hardest to avoid is option 3.

What happens next: three scenarios

Here is how I weigh the next six to twelve months. The probabilities are my judgement, not a model output.

Base case — the managed glide (≈55%). Cuts resume in October or December and continue in small steps. The policy rate drifts into the low 30s by spring 2027, inflation ends 2026 near the CBRT’s 28% forecast, and the lira keeps sliding about 1–1.5% a month. The carry still pays, but less: think low double digits in dollars rather than the 20%-plus of 2024–25. Stocks stay range-bound until the MSCI question is settled.

Bull case — the peace dividend (≈20%). The Strait of Hormuz reopens, oil falls back toward $80 and inflation drops faster. Moody’s and S&P follow Fitch toward upgrades, and the MSCI threat fades. The CBRT can cut faster without spooking anyone. In this world the trade rotates: longer-dated lira bonds and bank stocks beat plain cash.

Bear case — the stampede (≈25%). Something flips the belief: oil above $120, a snap-election call or a new crackdown on the opposition, contagion from the fund scandal into the banks, an MSCI downgrade, or a rate cut that looks politically dictated. $20–40 billion leaves within weeks, the lira gaps 10–15%, and the CBRT pulls the emergency brake for the third time in two years. We have seen this movie twice. The third run would start from a thinner firewall.

The dashboard: six signals to watch

You don’t need to predict the future. You need to notice when the game is changing.

Net reserves excluding swaps, published weekly. A slide below about $40 billion means the firewall is getting thin.
The real rate — policy rate minus expected inflation. Above roughly 5 points, the carry holds. Watch whether cuts outrun disinflation.
Monthly lira depreciation versus monthly inflation. If the lira starts falling faster than prices rise, the managed glide is over.
The effective funding rate versus the policy rate. When the CBRT quietly funds banks above 37%, it is under stress.
Brent and the Strait of Hormuz. Energy is Turkey’s most direct external shock.
The political calendar. Early-election talk, court cases against the opposition, and MSCI’s November review.

The bottom line

The lira carry trade is not really a bet on Turkey. It is a bet on other investors’ beliefs about Turkey — and on the central bank’s willingness to keep paying for stability.

For now, both hold. Real rates are positive, the CBRT has proven it will defend the currency, and the end date is still blurry. That makes staying rational.

But go in with your eyes open. You are being paid to hold a tail risk: the risk that everyone heads for the same exit on the same day. Size the position as if a 10–15% overnight gap is part of the deal — because twice in the past eighteen months, it was.

And remember who sits on the other side of the trade. When the people paying for your yield — exporters, workers, the public balance sheet — become politically louder than the people collecting it, the game ends. Game theory says the smart money won’t wait for the whistle.

This article is for information and education only and is not investment advice. Figures are the latest available at the time of writing (23 September 2026). Carry returns are before taxes, hedging and transaction costs; dollar returns combine the linked fund and exchange-rate data (author’s calculations), and 2026 lira fund returns are the author’s estimate. Scenario probabilities are the author’s judgement. Past returns are no guide to future returns.