Carry

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):

• Positive carry: the bond yield exceeds the financing rate, generating income. This is the norm when the curve is upward-sloping.
• Negative carry: financing costs exceed the bond yield, draining income. This occurs during inversions or when funding long-duration positions at elevated short rates.

Together, carry and roll-down form the breakeven rate — 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.