Carry
Carry is the return an asset delivers if its price does not change. Carry strategies hold high-carry assets and fund them with low-carry ones.
Drag across the chart to read values
Currency carry
Borrow in a low-interest currency, invest in a high-interest one, and collect the rate differential. Uncovered interest parity says the high-yield currency should depreciate by exactly that amount; empirically it often has not, which is why the trade has paid on average.
Carry in other markets
- Bonds: yield plus "roll-down" as a bond ages along an upward-sloping curve.
- Commodities: the roll yield from futures in backwardation (later contracts cheaper than nearer ones).
- Equities: dividend yield, adjusted for financing cost.
Koijen, Moskowitz, Pedersen and Vrugt (2018) showed a common carry premium across all of these asset classes.
The catch
Carry is often described as "picking up nickels in front of a steamroller". Returns accumulate slowly and are given back quickly in risk-off episodes, as in the yen carry unwind of 2008. Volatility targeting and diversification across many carry pairs are the usual defences.
Practice
Three quick tasks. Pick an answer to check it, or open the answer below each task.
You borrow at 1% and invest at 6%. If exchange rates do not move, what is your yearly carry?
Show answer
5%. Carry = 6% - 1% = 5%.
What does uncovered interest parity predict?
Show answer
The high-yield currency depreciates by the rate gap. In theory the gap is eaten by depreciation; empirically it often was not.
Carry returns are often described as...
Show answer
Picking up nickels in front of a steamroller. Small steady gains, large sudden losses in risk-off episodes.
Your score: 0 / 0