Negative Carry
Candlefocus EditorIn most cases, negative carry involves holding a security or an asset that is worth more than its current market value. This can include bonds, stocks, currencies or commodities. For example, if an investor purchases a bond that yields 5 percent per year, but in the long-term the investor expects the bond to yield 7 percent per year, the current holding cost pays for the expected future gain. So even though the current return is negative, the investor can expect a return in the future.
Negative carry can also be the result of diversifying an investment portfolio. For example, if investors want to spread out their risk over multiple asset classes, they may need to sacrifice short-term gains in order to achieve a prudent and diversified investment portfolio to help mitigate risk and improve long-term returns.
Negative carry is also a tool used by some investors in order to increase their leverage, as it allows them to buy an asset while not having to pay the full amount due to the cost of borrowing being lower than the return the investor is expecting to receive. While this can help investors maximize their returns, it can also carry with it a significant amount of risk and is a strategy that should only be done by experienced investors who are familiar with the markets.
Negative Carry can be a complicated and tricky strategy that requires careful analysis and evaluation to ensure that long-term gains outweigh the potential risks of the investment. Investors should always look at the potential positive and negative outcomes of any investment before deciding whether to execute the strategy.