Carry is the net income earned from holding a bond position, calculated as the bond's yield (coupon income) minus the cost of financing the position (typically the short-term repo rate or Fed funds rate).
Carry = Bond yield - Financing rate
For example, if the 10-year Treasury yields 4.25% and the overnight financing rate is 5.25%, the carry is -100 bps annualized. This negative carry means the position costs money to hold each day, which was the reality during much of the 2022-2024 inverted curve environment.
Carry is one of two components of the total expected return on a bond (the other being roll-down):
Together, carry and roll-down form the breakeven rate, which measures how much yields must rise before a long position loses money. The Salomon Brothers yield curve primer and the blog post "How to Read Implied Forward Rates" detail how carry analysis informs investment decisions.
Carry trades, borrowing at low short-term rates to invest in higher-yielding long-term bonds, are profitable only when the curve is steep enough and when rate moves don't overwhelm the carry income.
Carry is easier to use once you restate it in yield terms. A dollar amount of income tells you little on its own. What a trader wants to know is simple. How far can yields move against this position before the income is gone?
To answer that, divide the carry earned over the holding period by the modified duration of the bond. The result is a yield move in basis points. Yields can rise by that much over the period before the total return falls to zero.
Take a position with 30 bps of annual carry and a modified duration of 8.0 years. Over a three month holding period the position earns about 7.5 bps of carry. Divide 7.5 by 8.0 and the breakeven is about 0.9 bps. The yield can rise by roughly 1 basis point over the quarter before the trade loses money.
This restatement is what makes carry comparable across the curve. A 2 Yr note and a 30 Yr bond earn very different dollar amounts of carry. Stated as a breakeven in basis points, they can be ranked against each other directly.
Carry has two halves, and they accrue on different clocks.
Financing is the half that surprises people. If a position is funded overnight, the cost is not fixed. A rise in the policy rate raises the cost of the position every day it stays open. Funding the same position with a term repo fixes the cost for the term but gives up the chance to fund cheaper later.
A bond that is in heavy demand as collateral finances below the general rate. Traders call such an issue special. The cheaper funding raises the carry on that bond, which is one reason a newly auctioned issue often trades richer than an older issue of the same maturity.
Carry depends on the slope of the curve, not on the level of yields. A steep curve produces positive carry, because the yield on the bond sits well above the short rate that funds it. A flat curve produces close to zero carry. An inverted curve produces negative carry at every tenor that yields less than the funding rate.
Negative carry does not make a position wrong. It makes the position a bet on price. A trader holding a bond at negative carry is paying a daily cost in exchange for the gain that a yield fall would deliver. The question is whether the expected fall in yield is worth the cost of waiting for it.
This is also why carry is never read on its own. A steep segment of the curve produces both carry and roll-down. Adding them together gives the full breakeven, which is the number a portfolio manager actually acts on.
No. Yield is what the bond pays. Carry is what the bond pays after the cost of funding it. An unleveraged buyer who pays cash still faces the same comparison, because the cash could have earned the short rate instead. When the curve inverts, a bond with a positive yield can still have negative carry.
Because carry is only one part of the return. A trader who expects yields to fall will accept a daily cost to hold the position, in the same way that an option buyer accepts time decay. The cost is worth paying only if the expected price gain is larger than the carry lost while waiting.
Carry is income. It comes from the coupon minus the funding cost, and it does not require the curve to have any particular shape beyond being upward sloping enough to cover funding. Roll-down is a price gain. It comes from the bond aging into a lower yield on an unchanged curve, and it requires the local segment of the curve to slope upward.