Carry in Bonds and Interest-Rate Swaps

Summary

The document defines carry as the difference between the income earned on an asset and the cost of funding its purchase. This framing helps explain why a bond described as carrying well may appeal to a trader: its income relative to financing costs is favorable. The question also asks whether carry reflects curve steepness or relative value across issuers, but the response does not address those interpretations in detail.

For a payer interest-rate swap, there is no initial purchase cost in the example. Instead, cash flows arise through the fixed and floating legs. The response describes positive carry when the fixed rate paid is below the floating rate received. This is a simplified cash-flow explanation rather than a complete carry calculation: it does not discuss the holding period, discounting, curve roll-down, funding specifics, or changes in rates and spreads. Those factors can affect realized performance, so the stated comparison alone should not be treated as a full measure of expected trade return.

Key ideas

• Carry compares income earned from an asset with the cost of funding it.
• For a payer interest-rate swap, carry arises from the payments on the fixed and floating legs.
• The example identifies positive carry when the fixed rate paid is below the floating rate received.
• A basic carry comparison omits factors such as holding period, curve changes, and discounting.

Tags

# Can someone explain carry in bonds and swaps?


# Can someone explain carry in bonds and swaps?












When someone says "5Y Italy carrys very well". What exactly does that mean? Is it a reflection of the steepeness of the italian curve vs other issuers? And then how would one swap "carry" better than another swap?

## Answer by IsmaelGoodpeople (score 1)

https://quant.stackexchange.com/a/85377

Carry is the difference between what you earn from an asset and what you pay to fund the purchase.

In the case of Interest rate swaps payer for example, the IRS is zero cost at entry, and what you pay materializes in the fixed and floating legs.

Your trade would be positive carry if the the fixed (what you pay) is lower than the floater (what you receive).

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.