Bond Carry and Spread Contributions to Expected Returns

Summary

The document asks how to separate expected returns from carry and from spread changes when estimating sovereign bond returns over a year. The response distinguishes holding a bond and earning its yield from the return associated with its market spread, but explains the distinction only briefly. It describes carry as tied to the coupon and yield to maturity, while noting that secondary-market yield reflects the bond’s price and spread.

The exchange offers no calculation method, worked example, or supporting evidence, and its wording risks conflating coupon income, yield to maturity, and spread contribution. Yield to maturity is a return measure based on price and cash flows under holding and reinvestment assumptions; spread changes can also affect price and hence realized return. The discussion is therefore a starting point for understanding the categories, not a sufficient method for forecasting total returns or assigning returns to them.

Key ideas

• Carry is associated with bond income over the holding period.
• Yield to maturity reflects both a bond’s cash flows and its market price.
• Spread-related return and carry are separate components in the assignment’s framework.
• The response does not provide a calculation method or resolve how to attribute return components.

Tags

# Indexes and return spreads


# Indexes and return spreads












First and foremost thank you for reading my question, I hope all if you have a Happy Holiday this weekend.

On to my question:

I am completing an assignment on global sovereign bonds, I've been provided with a deck of countries followed with data on bond issuance date, maturity, coupon. The deck also includes yield (to maturity, call, worst), spread and et cetera.

I am asked to calculate expected total returns over the next 12 months based on target spreads provided. I am to categorize the expected returns into different categories (e.g. 5-10 year maturity sovereigns, credit rating).

On each of these categories I am to calculate expected return from spread and expected return from carry (i.e. yield).

I'm confused by what the difference between these two are.

Thanks again!

## Answer by MattR (score 1)

https://quant.stackexchange.com/a/25121

Happy holidays to you too.

The difference is that in one case you hold the bond to maturity (carry) with the Cupon Rate. And the expected return is the YTM (yield) seen on the secondary market trades + the spread.

That's it.

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