Carry strategies in investing: earning the spread across currencies, bonds, and commodities

Carry is the return earned from holding an asset, independent of price appreciation. In a currency carry trade, carry is the interest rate differential between two currencies. In a bond carry trade, it is the yield spread above a benchmark. In commodities, it is the roll yield from the futures curve. Across all asset classes, the principle is the same: systematically hold assets that pay a higher running yield than the assets you sell or borrow against, and collect the spread. Carry is one of the most extensively documented and persistent return premia in financial markets.

What carry is

Carry, in its broadest definition, is the expected return of an asset assuming prices remain unchanged. For a bond, carry is the coupon minus any price change from duration drift. For a currency, carry is the interest rate differential between borrowing in a low-rate currency and investing in a high-rate one. For a commodity future, carry is the roll yield—the return from rolling an expiring contract into the next one, which is positive (backwardation) or negative (contango) depending on the shape of the futures curve.

Koijen, Moskowitz, Pedersen, and Vrugt (2018) formalised carry as a unified concept across asset classes. Their study, covering equities, government bonds, currencies, and commodity futures over 1972–2012, found that a long-short carry strategy delivered positive risk-adjusted returns in all four asset classes, and that carry returns across different asset classes are largely uncorrelated—adding carry as a cross-asset strategy diversifies the portfolio rather than concentrating it.

How each type of carry works

Currency carry trades borrow in low-interest-rate currencies and invest in high-interest-rate currencies. A classic implementation borrows in Japanese yen—historically the world's lowest-yielding major currency—and invests in Australian dollars or Brazilian reais. The carry income is the interest rate differential, which can be several percentage points per year. This premium exists because the uncovered interest rate parity theory predicts that high-yielding currencies should depreciate by the amount of the yield differential; in practice, this tends not to happen, leaving the carry largely intact. See the currency carry trade for a detailed explanation.

Bond carry trades go long bonds with high yield-to-maturity and short bonds with low yield-to-maturity, controlling for duration to isolate the credit or term premium component. Within government bond markets, this means going long the higher-yielding countries' bonds; across credit quality, it means favouring corporate bonds over government bonds of the same duration. The carry income is the yield spread, which reflects compensation for credit risk, term risk, or both.

Commodity carry comes from the shape of the futures curve. When a commodity's futures curve is in backwardation—near-term prices above long-term prices—rolling a long futures position forward generates positive carry because the investor sells expiring contracts at a higher price and buys the next contract at a lower price. This is the mechanism underlying the premium in commodity markets where there is a convenience yield—the benefit of holding physical inventory, as in oil and agricultural markets.

What the evidence shows

Carry has been documented as a persistent return premium across asset classes since at least the 1980s in live data, and in historical studies extending back to the 1870s for currency and commodity markets. Hurst, Ooi, and Pedersen (2017) found that carry strategies delivered Sharpe ratios in the range of 0.4–0.8 across asset classes in their extended study. Importantly, carry returns have low correlation with momentum returns—the two strategies tend to perform well in different environments, making them natural complements in a multi-factor portfolio.

Limitations and trade-offs

Carry strategies are often described as "picking up nickels in front of a steamroller"—generating small, consistent returns with the occasional large, sharp loss. The defining risk of a carry strategy is the unwind: when market conditions shift suddenly (a flight to safety, a financial crisis, or an emerging market currency crisis), high-yielding assets fall sharply in price as investors reverse carry positions simultaneously. The 2008 carry unwind was one of the worst episodes in recent history: the carry trade unwound violently as investors sold high-yielding emerging market currencies and bought back yen, producing losses of 30–40% in currency carry strategies in a matter of weeks.

The carry premium does not come for free—it compensates for the risk of these infrequent but severe drawdowns. Whether carry represents a genuine risk premium or an irrational mispricing is debated; most evidence supports the risk premium interpretation, with carry assets tending to perform poorly precisely in bad economic times when the loss is most painful. This means carry strategies require a long investment horizon and the psychological resilience to hold through sharp drawdowns.

Carry strategies in pfolio

Carry is one of the selection signals used in pfolio's systematic portfolio construction, applied across currencies and fixed income to identify assets with favourable running yield characteristics. In combination with momentum signals, carry helps identify assets where both the price trend and the running income are positive—a higher-conviction combination than either signal alone. The methodology is described in how we build portfolios. For the currency-specific implementation, see the currency carry trade.

Related articles

• The currency carry trade: borrowing low-yield currencies to invest in high-yield ones
• Factor investing explained: how systematic risk premia drive long-run returns
• Momentum investing: the evidence behind buying recent winners
• Contango and backwardation: how the shape of the futures curve affects long-term returns