What it means
The idea applies wherever a position is funded. A bond bought with borrowed money earns coupon interest and pays repo interest, a foreign currency deposit earns one country's rate while the funding currency charges another, and a physical commodity earns nothing while incurring storage and insurance.
Carry is deliberately separate from price change. A position can have handsome positive carry and still lose money if the asset falls in value, which is exactly why the two components are reported separately in trading performance attribution.
The practical importance is that carry accrues predictably. Over a short holding period it is close to a known quantity, whereas price movement is not, so it is the part of the return a risk manager can actually plan around.
Carry also explains the shape of many markets. A steep upward-sloping yield curve creates positive carry for anyone borrowing short and lending long, which is precisely the business model of a traditional bank.
The nuance is that positive carry usually compensates for a risk rather than being free money. Positions with attractive carry tend to be those most likely to lose value suddenly, which is why the strategy is sometimes described as collecting small, steady gains ahead of occasional large losses.
In practice
Real-world examples.
Example
A corporate treasurer holds surplus cash in a three-month deposit yielding 4.6% while the company's revolving credit facility costs 6.1%. The negative carry of 1.5% tells her it is cheaper to repay the facility than to hold the deposit, even though the deposit looks like it is earning money.
Example
A commodities trader stores refined metal in a warehouse. Storage, insurance and financing come to roughly 4% a year with no income from the metal itself, so the position has negative carry and is only worth holding if the forward price justifies the wait.
Example
A bank funds a portfolio of ten-year mortgages at 4.8% using deposits costing 1.9%. The positive carry of 2.9% is the core of its net interest margin, and the risk officer models what happens to it if deposit rates rise faster than the mortgage book reprices.
Think of it
“Carry is the manager's profit share-short for carried interest.
Formula
Calculation
Carry = (income yield - funding cost) x position size, adjusted for the holding period.
Worked example. A treasury desk buys $10,000,000 of a corporate bond yielding 5.2% and funds the purchase in the repo market at 3.4%.
Annual carry = (5.2% - 3.4%) x $10,000,000 = 1.8% x $10,000,000 = $180,000.
If the position is held for 90 days on a 360-day convention, carry earned = $180,000 x 90 / 360 = $45,000.
Now add price movement. If the bond's price falls by 1% over that quarter, the mark-to-market loss is 1% x $10,000,000 = $100,000, so the total result is $45,000 - $100,000 = -$55,000. The carry was real and positive, and the position still lost money, which is the whole point of tracking the two separately.Case study
Seen in the real world.
This is a fictional, illustrative scenario. Mallowfield Treasury Services, an invented corporate treasury team, kept $10,000,000 in a bond position generating $180,000 of annual carry and reported it proudly each quarter as a contribution to group finance costs.
When the finance director asked for the position to be reported with price movement alongside carry, the picture changed. Over one quarter the desk booked $45,000 of carry and a $100,000 mark-to-market loss as credit spreads widened, for a net result of -$55,000, even though the carry line had looked healthy in isolation.
The team rewrote its reporting to show carry, price movement and financing cost as three separate lines, and set a spread-widening limit that would trigger a review. Nothing about the strategy was wrong; the illustrative lesson is that reporting only the predictable component of return makes a risky position look safer than it is.
Watch out
Common mistakes.
- Treating positive carry as a guaranteed profit, when it is only the income component and says nothing about what the price will do.
- Ignoring funding cost when assessing an investment's return, which makes any yield look attractive in isolation.
- Confusing this sense of carry with carried interest in a fund, which is an entirely different concept sharing a short name.
Questions
People also ask.
What is the carry on cash?
It is the deposit rate you earn minus your own cost of funds, which for a company with drawn debt is often negative.
Does carry apply to equities?
Yes, in the form of dividend income less financing cost, which is exactly how equity futures and total return swaps are priced.
Why do traders say they are short carry?
It means the position costs more to finance than it yields, so every day held reduces the result before any price movement.
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