Negative Carry

Understanding Negative Carry in Trading

If you are new to trading, terms like Negative Carry might seem a bit complex. Don't worry! We will simplify it for you. Negative Carry in the context of trading refers to a situation where the cost of holding an investment is higher than the income it generates.

The Basics: Clarifying Negative Carry

Negative Carry occurs when the interest costs associated with borrowing funds to finance an investment outstrip the earnings from that investment. As a result, you end up with a net loss on your investment or a negative return. It is important to understand this concept as it plays a crucial role in investment and trading strategies.

Negative Carry: An Example

To provide a clear example of Negative Carry, consider you borrow money at a 5% interest rate to invest in bonds yielding a 4% return. Here, your carry is negative because the cost of borrowing (5%) is more than the return on the invested funds (4%).

Impact of Negative Carry

Experiencing a Negative Carry in your trading activities can impact your profits and overall investment portfolio. It is a burden as you are making an investment that does not cover the costs associated with it. Moreover, it can potentially expose you to larger losses as you must manage the losses associated with the negative return and the cost of investment.

How to Handle Negative Carry

Dealing with Negative Carry can be challenging, but not impossible. It involves being more strategic about your investments, such as diversifying your portfolio, changing investment plans, or reducing borrowing costs. It's also essential to continually monitor your investments to promptly spot any signs of a Negative Carry scenario.