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Carry (fixed income)

The income a bond position earns over its funding cost while nothing else changes; positive when the bond yields more than the repo rate.

A leveraged bond position earns the running-yield and pays the repo rate. The difference is carry. With an upward-sloping curve, long bonds funded overnight produce positive carry and the position pays you to wait.

Carry is why an inverted-yield-curve is painful for leveraged bond holders: funding costs more than the bond yields, so time works against you and you need the price to move to break even.

Example: a 10-year yields 4.30% and repo funding costs 5.35%. Carry is -105 bp a year, roughly -8.75 bp a month. Yields must fall about 1 bp a month just to stand still on a position with duration 8.

Related: roll-down, running-yield, forward-rate, inverted-yield-curve

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

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