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, 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.