Roll-down return (or "riding the yield curve") is the capital gain a bond earns simply by aging in an upward-sloping yield curve environment. As time passes, a bond's remaining maturity shortens, and if the curve is upward-sloping, it "rolls down" to a lower yield, which means a higher price.
For example, consider a 10-year Treasury with a yield of 4.25%. If the 9-year point on the curve is at 4.15%, then over the next year (assuming the curve shape doesn't change), the bond rolls from the 10-year point to the 9-year point, capturing approximately 10 bps of yield decline. The price gain from this roll is approximately:
Roll-down return = (10Y yield - 9Y yield) x modified duration
Roll-down is a component of total expected return alongside carry (coupon income minus financing cost). Together, carry and roll-down form the breakeven rate move: how much yields must rise before a long position loses money.
Roll-down is largest where the curve is steepest. In a normal curve environment, the 2-year to 5-year sector often offers the best roll-down per unit of duration risk. Roll-down provides zero benefit in a flat or inverted curve.
Portfolio managers use roll-down analysis to identify the most attractive maturities for buy-and-hold strategies and to compare relative value across the curve.