Carry (Rates)
In fixed income, the net income earned by holding a bond position after financing costs — positive carry means the bond yields more than its funding rate.
In fixed income, carry is the net return from holding a bond position over time. A bond that yields 5.0% funded at an overnight repo rate of 4.5% earns 50 basis points of carry per annum. Positive carry is the P&L earned just by holding the position.
Carry trades in rates involve going long higher-yielding instruments and funding them with cheaper short-term borrowing — essentially running a leveraged duration position. Carry is maximised on a steep curve (borrow short, lend long) and compressed or negative on a flat or inverted curve.
When the yield curve is inverted, carry is negative — holders of long bonds are paying more to finance them than they earn in coupon income. This is a powerful economic force that drives curve re-steepening over time as carry traders exit long-duration positions.
Example
A hedge fund buys $10M of 10-year T-Notes yielding 4.6% and funds the position via overnight repo at 5.3%. The carry is -70bp annualized — a cost of $70,000/year to hold the position. The fund needs curve steepening or capital appreciation to be profitable.
Related Terms
Federal Funds Rate
The overnight interest rate at which U.S. banks lend reserve balances to each other — the primary policy rate the Fed targets to steer the economy.
IntermediateInverted Yield Curve
When short-term Treasury yields exceed long-term yields — historically the most reliable leading indicator of U.S. recession.
IntermediateYield Curve
A graph of Treasury yields across all maturities — from 3 months to 30 years — that maps the term structure of interest rates at a given moment.
Intermediate