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.
On the desk
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.