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Roll-down

The price gain a bond earns simply by ageing into a lower point on an upward-sloping yield curve, with no change in the curve itself.

Hold a 5-year bond for a year on an unchanged curve and it becomes a 4-year bond, repriced at the lower 4-year yield. Lower yield means higher price, and that gain is roll-down. Add it to carry-fixed-income and you get the total return of standing still.

Roll-down is largest where the curve is steepest, which is why traders hunt for the steepest segment rather than simply buying the highest yield.

Example: the 5-year yields 4.20% and the 4-year 3.95%. After one year the bond is repriced 25 bp lower. With duration near 3.8, that is about 0.95% of price gain on top of the 4.20% coupon.

Related: carry-fixed-income, normal-yield-curve, flat-yield-curve, forward-rate, duration

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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