Interpreting Carry on Treasury Steepeners Versus Outright Positions
Summary
The document clarifies how carry on a Treasury curve steepener can compare with carry on an outright long-duration position. It distinguishes the financing cost of holding the two legs from the carry described in a market report. For a payer position over a chosen horizon, the response defines carry through the difference between the current rate and the rate at the horizon for a bond with its remaining tenor shortened by that horizon. The receiver convention reverses the comparison.
On an upward-sloping curve near the long maturity, the example implies negative carry for a long-end payer. A short-end receiver with positive carry can make the combined steepener’s carry less negative than an outright long-end position. The explanation is qualitative; it supplies no market data or numerical validation. It also cautions that carry may be combined with rolldown in some sources, so the report’s definitions and horizon matter.
Key ideas
- Carry can refer to the horizon payment implied by holding a rate position, rather than simply its financing cost.
- For a payer, the example calculates carry from the current rate and the horizon rate at the shortened remaining tenor.
- An upward-sloping curve can give a long-end payer negative carry.
- Positive carry on the short-end receiver can improve a steepener’s combined carry relative to an outright long-end position.
- Market reports may combine carry and rolldown, so their definitions should be checked.
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Full text
# Carry of a 5s/30s steepener relative to that of an outright long # Carry of a 5s/30s steepener relative to that of an outright long I understand that the carry of a steepener trade is the cost of financing the position e.g. the rate you are receiving on your short-end long, net the rate you are paying to short the long-end. However, what is the carry of an outright long position? A report reads: "I continue to favor steepeners as a core representation of my strategically bullish view: steepeners trade like a long-duration exposure, but with a better carry profile, and should be supported by rising term premium..." what exactly does this mean? For reference, the steepeners being talked about are 5s/30s in the US treasury market. ## Answer by Nigel (score 1) https://quant.stackexchange.com/a/80602 I might not have understood correctly, but this sounds more like the price of the curve trade rather than the carry. On this note, yes, a 5s30s steepener will be cheaper than a 30y payer outright. > "the rate you are receiving on your short-end long, net the rate you are paying to short the long-end." I would think the carry in the report you read has a different definition. The carry for a (assumed) 6m horizon is the certain payment that is earned during that period. Using your 30y paid position as an example, and using the notation R(term, tenor), the 6m carry on it is $$ Rate(0, 30y) - Rate(6m, 29.5y) $$ If the curve is upward sloping just prior to the 30y point, then your carry on the 30y payer position is negative. The report you have implies that a 5y receiver position has positive carry, so that makes the carry of the steepener position less negative than the outright. I don't have actual numbers with me, but you can plug the values into the formula above to calculate the actual carry values to validate the report's claim. Note that the formula is for a payer position, for a receiver position it's the forward minus spot. Related to carry is the roll down, and sometimes they're bundled together commonly as carry + rolldown, though some sources may just refer to it as carry so you might have to look out for any footnote or definitions that are set out by the author.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.