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Negative Carry


What does Negative Carry mean?

A negative carry is a situation in which an investment has a lower yield than the cost of funding for it. The cost of holding a security exceeds the yield earned.

Futures Knowledge Explains Negative Carry

Suppose an investor borrows $5,000 at 4% from a bank and purchases short term US Treasury bond yielding 0.75%.  He will lose money for the time being. This is an example of a negative carry.

The investor gets negative return by carrying such investment. Prima facie it looks the investor loses money.  But sometimes this may be a prudent and conscious business decision.  For example, you may keep liquid fund borrowed from bank and wait for good long term investment opportunity. Here you will have negative earnings for a short period but anticipates having positive earnings in future.



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