Carry is the income earned (or paid) for holding a position over time, independent of price change — the coupon, yield, or interest-rate differential captured while waiting. Positive carry pays you to hold; negative carry costs you. It is the return that accrues if nothing moves.
How it works
Carry decomposes a position's expected return into the part earned from passage of time (yield, coupon, rolldown, or funding-rate differential) versus the part earned from price movement. In fixed income, carry ≈ yield of the asset minus financing cost; in FX, it is the interest-rate differential between the long and funding currencies. A position with rich carry can be held profitably even in a flat market, but carry compensates for risk — when spreads are tight, the carry may no longer pay you for the duration, default, or volatility risk borne.
Why it matters now
With nominal credit spreads near cycle tights in 2025, our briefings flagged that short-end credit carry "no longer compensates" for duration and default risk — the classic late-cycle signal to move up in quality or shorten duration. In a higher-for-longer rate regime, funding costs erode carry, making the yield-versus-financing calculus sharper than during the ZLB era.
Example
A 2-year corporate bond yielding 5.2% financed in repo at 4.6% generates roughly 60bp of positive carry annually before rolldown — the investor earns that spread if yields and the credit spread stay flat. But if the credit spread is only 70bp over Treasuries while historical 2-year default-adjusted loss expectation plus volatility justifies 120bp, the carry "no longer compensates": the position pays less than the risk warrants, the signal our desk cited for going short duration in nominal credit.
Frequently asked
- What is carry in finance?
- Carry is the income or yield earned for holding a position over time, separate from any gain or loss on price. Positive carry means the position pays you to hold it — like a bond yielding more than its financing cost; negative carry means holding it costs you. It is the return that accrues if prices stay unchanged.
- How is carry calculated for a bond?
- Bond carry is approximately the asset's yield minus its financing cost, plus rolldown along the curve. A bond yielding 5.2% financed in repo at 4.6% carries roughly 60bp annually before rolldown. The investor earns that spread for each period the position is held if yields and spreads stay flat.
- What is the difference between carry and a carry trade?
- Carry is the income earned from holding any position; a carry trade is a strategy that deliberately borrows in a low-yielding instrument or currency to fund a higher-yielding one, capturing the differential. The classic FX carry trade funds in yen or Swiss francs to buy high-rate currencies, profiting from the rate spread until exchange rates move against it.
- Why does carry stop compensating investors?
- Carry stops compensating when the yield pickup falls below the risk borne — duration, default, or volatility risk. When credit spreads compress to cycle tights, the carry earned may no longer cover expected default losses or the cost of holding duration. This is a classic late-cycle signal to shorten duration or move up in quality, as our 2025 credit briefings flagged.
- Why does carry matter more in a higher-for-longer regime?
- Carry matters more when rates are high because funding costs erode the income earned from leveraged positions. During the zero-lower-bound era, cheap financing made positive carry easy; with policy rates elevated in 2025, the yield-minus-funding calculus tightens, and positions that carried well at low rates can flip to negative carry.