Carry-Roll-Down

What Is Carry-Roll-Down?

Carry-Roll-Down is the total return a fixed income position earns over a holding period assuming the yield curve remains unchanged, it is the sum of carry (net coupon income minus financing cost) and roll-down (price appreciation as the bond shortens in maturity and moves to a lower-yield point on an upward-sloping curve). Understanding the distinction matters: carry is the income component, while roll-down is a capital appreciation component driven purely by the shape of the curve. A 10-year Treasury that yields 4.50% financed at SOFR of 5.30% has negative carry of approximately -80 basis points annualized, but if the 9-year point yields 4.30%, the bond rolls down 20 basis points of yield over one year, producing roughly 1.4 points of price appreciation on a duration-7 instrument, partially offsetting negative carry. The net carry-roll-down is the arithmetic combination of both effects, often expressed in basis points per month or as an annualized percentage.

Why It Matters for Traders

Carry-roll-down is the silent P&L engine of fixed income portfolios. When traders talk about a trade 'paying you to wait,' they are describing a high carry-roll-down position. In a steepener trade or butterfly trade, carry-roll-down is often the primary source of expected return, the trade profits even if rates do not move. Conversely, many duration-extension trades have deeply negative carry-roll-down, meaning the trader must be correct on the directional rate move within a finite horizon or suffer steady erosion. For cross-asset carry strategies, fixed income carry-roll-down feeds directly into total portfolio carry calculations alongside FX carry and credit spread carry.

How to Read and Interpret It

Practitioners calculate carry-roll-down in three steps:

1. Carry: Yield of the bond minus the short-term financing rate (repo or SOFR). This is the net income per unit of duration per year.
2. Roll-down: The yield difference between the bond's current maturity and its maturity one year hence, multiplied by the modified duration at the future date. A steeper curve produces more roll-down.
3. Total: Carry + Roll-down, expressed in basis points per annum or as a dollar P&L per $1mm DV01.

A carry-roll-down above +50 bps/year in the current rates environment is considered compelling for relative-value fixed income strategies. A negative carry-roll-down requires a directional rate view to justify the position, the breakeven yield move needed to offset negative carry-roll-down is a critical risk management input.

Historical Context

The 2004–2006 Fed tightening cycle created a notorious carry-roll-down trap. The Fed raised the Fed Funds Rate from 1.00% in June 2004 to 5.25% by June 2006, yet the 10-year Treasury yield barely moved, the 'Greenspan conundrum.' Traders positioned in 2-year Treasuries expecting to earn positive carry-roll-down as the curve normalized found the front-end rising rapidly while the long end stayed anchored, producing an inverted yield curve by 2006. Carry-roll-down on 2-year notes turned sharply negative as their yield rose above the 10-year, and roll-down evaporated entirely once the curve flattened. Traders who had assumed static carry-roll-down as their base case P&L suffered significant mark-to-market losses even without taking outright duration positions.

Limitations and Caveats

The fundamental assumption underlying carry-roll-down is curve stasis, that yields at each maturity remain unchanged over the holding period. In practice, yield curves shift, twist, and butterfly constantly. Carry-roll-down can reverse violently: a bear steepener that lifts long-end yields destroys roll-down value on long positions. Additionally, for non-sovereign bonds, credit spread widening can offset or overwhelm carry-roll-down, meaning the concept must be adjusted to include spread carry separately. Embedded negative convexity in mortgage-backed securities further complicates carry-roll-down calculations since prepayment optionality alters effective duration as rates change.

What to Watch

• Curve steepness at the 2s10s and 5s30s points: steeper curves generate more roll-down, making long positions more attractive on a carry-roll-down basis.
• Repo rates vs. coupon levels: when SOFR or repo rates exceed coupon yields, carry turns negative and the full burden falls on roll-down to justify holding.
• Forward curve shape: carry-roll-down is greatest when the forward curve is elevated above spot rates, implying the market expects significant rate rises that fail to materialize.
• Duration extension flows: institutional demand for long-duration assets often signals that carry-roll-down calculations are supportive of extending maturity.

How Carry-Roll-Down Plays Out in Practice

Consider a desk running a $250 million long position in the 5-year Treasury (CT5) on May 13, 2026. The 5-year auctioned earlier this month at 4.18%, the 4-year point on the par curve sits at 4.07%, and term repo for a six-month horizon is quoted at 3.62% (just inside the 3.50-3.75% Fed funds band). The trader builds the carry-roll-down decomposition as follows:

• Carry leg: 4.18% coupon minus 3.62% repo = +56 bp annualized of pure income, roughly $1.40 million over six months on the notional.
• Roll-down leg: Over six months the bond ages from a 5-year to a 4.5-year. The 4.5-year point currently yields about 4.12% (interpolated). That's roughly 6 bp of yield giveback over six months. Multiplied by the position's spot DV01 of approximately $115,000 per bp, that's another ~$690,000 of mark-to-market lift if the curve simply stays put.
• Total expected static return: about $2.1 million, or roughly 84 bp on capital over six months. Annualized that is ~170 bp of pure curve return, before any directional rate call.

What the PM actually does with this number is the interesting part. First, she compares it against the implied forward yield: the 6-month forward 4.5-year yield is trading at 4.24%, meaning the market is pricing the bond to sell off 12 bp by November to neutralize her carry-roll-down. If she believes realized rates will be flat or lower than that forward, the trade has positive expected value. Second, she stress-tests breakeven: how much do rates need to rise before carry-roll-down is wiped out? At a DV01 of $115,000/bp and an expected $2.1 million in carry, the position absorbs an 18 bp parallel sell-off before the trade turns red on a six-month horizon.

This is also where the trade fails quietly. If repo grinds higher because the Treasury General Account drains and reserves tighten (a scenario the desk is watching closely heading into the June quarter-end), every 10 bp of repo creep eats ~$125,000 of carry. The PM hedges this by locking term repo or layering on a small SOFR/FF basis position. The point is that carry-roll-down is not a passive number reported by the risk system, it is an active, hedgeable, decomposable expected return that drives sizing decisions across the rates book.

Current Market Context (Q2 2026)

The Q2 2026 carry-roll-down environment is unusually constructive for intermediate Treasury holders despite the stagflation-stable regime. With Fed funds anchored at 3.50-3.75% and SOFR (FRED: SOFR) running near 3.62%, the front-end financing cost finally sits below most of the coupon curve from the 3-year out. That's a flip from 2023-2024 when SOFR above the entire belly meant aggressive negative carry on long positions.

The 5s30s curve at roughly +85 bp (FRED: T10Y2Y is at +48 bp; the 5s30s reads cleaner since it strips out imminent Fed expectations) is the steepest it has been since 2021. That makes 7-10 year roll-down particularly attractive: a 10-year aging to 9 years currently picks up roughly 9 bp of yield drop, translating to ~70 bp of price appreciation on a duration-7.5 instrument. Combined with the 56-70 bp of carry available in the belly, total static returns of 150-170 bp annualized are achievable without taking a directional view.

The risk to the trade this quarter is the MOVE index. MOVE is currently around 92, well below the 130+ stress prints of 2023, but the May Treasury refunding announcement and the June FOMC are catalysts that could reprice term premium. Watch the NY Fed ACM term premium series (FRED: THREEFYTP10): a 25 bp upward repricing of term premium would erase a year of roll-down on a 10-year position. Also watch IG OAS (currently ~92 bp) and HYG carry, because credit roll-down trades have collapsed below Treasury equivalents on a risk-adjusted basis. On the futures side, TY (10Y note futures) net basis is wide enough that the implied repo rate is running 5-8 bp cheap to GC, a free pickup for funds that can warehouse the basis.

What to monitor: The 5s30s slope minus 10-year ACM term premium. If the spread compresses below 30 bp, roll-down trades stop paying you to wait.