Interpreting Carry and Break-Even Yield for a Short Treasury Bond

Summary

The document interprets carry on a short long-dated Treasury position by connecting the current yield with the yield implied for a shorter-maturity bond at a future date. It explains negative carry as a drag that must be offset by a favorable market move for the trade to break even. The example compares a current 4% yield with a 4.1% forward yield six months later.

In that example, the short position needs the bond's yield to rise by the forward amount for the resulting price decline to compensate for coupon income less financing over the holding period. The explanation offers intuition for why negative carry raises the break-even hurdle. It is a simplified illustration rather than a full bond P&L model: actual results can also depend on financing terms, coupon and accrued-interest treatment, curve changes, and how the position is valued.

Key ideas

• Negative carry means the position incurs a holding-period drag before market moves are considered.
• A short bond position may need yields to rise enough for price gains to offset that drag.
• Comparing current and forward yields helps express the trade's break-even hurdle.
• The example abstracts from detailed financing, cash-flow, and valuation conventions.

Tags

# Carry of a short bond position


# Carry of a short bond position












I am short a 30yr treasury. I am told (in a previous answer linked) that the 6 month carry of this position is given by $$ Rate(0, 30y) - Rate(6m, 29.5y) $$ Where the first term is the current rate for a 30yr bond, and the second term is the 6m forward rate for a 29.5 year bond.

In what sense is it a “loss” if this is < 0? What is the intuition behind this definition of carry?

Also, if this difference is positive does that mean carry costs are positive, or that carry is positive?

## Answer by dm63 (score 2)

https://quant.stackexchange.com/a/80616

An example might help: if you are short a bond with a 4% yield , whose 6m forward yield is 4.1%, then you need the yield of this bond to be at least 4.1% 6 months from now for your trade to make money. In this case, the capital gain from the 10bp selloff will equal the expected loss from (coupon minus financing) that you will suffer over the 6 months. The situation is known as “negative carry” because you need the market to move in your favor just to break even.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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