Carry
Getting paid to wait—or paying for the privilege.
Why Carry Changes Everything
In January 2021, you could earn 1.5% per year just holding 10-year Treasuries. Buy the bond, finance it in repo, pocket the difference. Do nothing. Get paid.
By late 2022, the same trade cost you 1.5% per year. Same bond. Opposite outcome. What changed?
The yield curve inverted. Short-term financing rates exceeded the yield on long bonds. Suddenly, being long duration meant bleeding money every single day—regardless of whether you were right about rates.
This is why carry is the first thing professional traders check. You can be right about direction and still lose money if carry is against you and timing is wrong. Carry determines whether time is your friend or your enemy.
Learn From History
Select a period to see how carry shaped trading decisions—and outcomes:
Steep Curve - Free Money?
Carry: +88 bps/yrThe Setup
Fed pinned rates at zero. Repo was nearly free. 10Y yielded ~1%. Holding duration was like getting paid to wait.
What Happened Next
Carry trades worked beautifully for months. Then inflation arrived. 10Y yields jumped from 1% to 1.7% in weeks. The carry cushion evaporated, and longs got crushed.
When Carry Works (And When It Kills You)
Carry Trades Work When...
- Curve is steep: Long-end yields exceed short-term financing. Time pays you.
- Volatility is low: Stable yields mean your carry accrues without price losses.
- Your bond is special: High demand for shorting means cheaper financing for you.
- Fed is on hold: No surprise hikes to blow up your financing costs.
Best environment: 2020-2021. Fed pinned at zero, QE suppressing volatility, steep curve. Carry trades were a license to print money—until they weren't.
Carry Trades Kill You When...
- Curve is inverted: Financing exceeds yield. Every day costs money.
- Yields are rising: Negative carry compounds mark-to-market losses.
- Duration is high: More duration = more carry bleed in inverted environments.
- You're early: Being right eventually doesn't help if carry bankrupts you first.
Worst environment: 2022-2023. Inverted curve, rising rates, high volatility. Long duration positions bled from both carry and price losses. Many traders were right about eventual Fed cuts but couldn't survive the wait.
The Breakeven Question
Here's the question every carry trader asks: "How much can yields move against me before I lose money?"
If you have +50bps of annual carry and 8 years of duration, your breakeven is roughly 6 bps per month. Yields can rise 6 bps monthly before your carry is wiped out by price losses.
Positive Carry (+50 bps/yr)
Yields can rise modestly and you still profit. Time is on your side.
Negative Carry (-50 bps/yr)
Yields must fall 5+ bps monthly just to break even. You're fighting the clock.
This is why timing matters more with negative carry. You need to be right and on time. With positive carry, you can be wrong for longer before it hurts.
The Repo Special Edge
Not all bonds finance the same. Special bonds—those in high demand for shorting or settlement—finance cheaper than general collateral (GC).
On-the-run Treasuries (the newest issue) often trade 20-100 bps special. This can turn marginal trades profitable:
Pro tip: When the on-the-run bond is trading deeply special, it's often because everyone wants to short it. That's a signal—either the market expects yields to rise, or there's a technical squeeze. Either way, pay attention.
Carry Across the Curve
Different maturities offer different carry. On a current market:
In the current market, carry varies by sector based on curve shape and coupon levels.
Build a Carry-Focused Position
Trade Legs
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Trade Examples (Simple)
Here are three real-world examples explained like you're five (well, maybe fifteen):
Example 1: Positive Carry Paradise (2021)
You buy $10M of 10-year Treasuries at 1.5% yield. You finance at 0.1% repo rate.
You put up $500K margin and repo-finance the $10M position at 0.1%. You earn 1.5% on $10M, pay 0.1% on $10M borrowed. That 1.4% spread is your carry. With 20x leverage, your $500K equity earns $140K = 28% return on equity.
You hold for 1 year, rates don't move.
You earn 1.5% coupon, pay 0.1% financing = 1.4% net carry. $10M x 1.4% = +$140,000
You got paid $140K just to hold bonds for a year. The steep curve meant you earned way more than you paid to borrow. Free money (until rates moved).
Example 2: Negative Carry Pain (2023)
You buy $10M of 10-year Treasuries at 4% yield. But now repo is 5.3%.
You put up $500K margin and repo-finance at 5.3%. You earn 4.0% coupon, pay 5.3% repo = -1.3% carry. With 20x leverage, your $500K equity loses $130K = -26% return on equity. Negative carry destroys leveraged positions.
You hold for 1 year, rates don't move.
You earn 4% coupon, pay 5.3% financing = -1.3% net carry. $10M x -1.3% = -$130,000
You PAID $130K to hold bonds for a year. The inverted curve meant financing cost more than you earned. You need rates to fall just to break even.
Example 3: The Repo Special Edge
You buy $10M of the newest "on-the-run" 10Y Treasury. It trades "special" in repo at 4.8% vs 5.3% general collateral.
On-the-run bonds are in high demand—shorts need to borrow them for delivery, so lenders accept lower repo rates to get their hands on these securities. You repo-finance your $10M position at 4.8% instead of 5.3% GC. That 50bp discount is pure carry improvement. With 20x leverage, the 50bp savings becomes 10% extra return on equity.
You hold for 1 month.
Normal repo would cost $44K/month. Special repo costs $40K/month. You save $4K.
Hot bonds that everyone wants to borrow trade at lower repo rates. You pocket the 50bp difference. It's not huge, but it adds up.