International Carry Investing on the Yield Curve
Log in to collectAcademic paper
Strategy in a nutshell
The strategy constructs a long-short portfolio using bond forwards from developed countries, including Australia, Canada, Denmark, Germany, Japan, Norway, Sweden, Switzerland, the UK, and the USA. Long positions are taken in high-carry maturity buckets, while short positions target low-carry maturities. Each forward’s position size is adjusted for duration risk to maintain a duration-neutral portfolio. Weights are determined by the forward’s carry (yield spread plus roll-down) and duration, ensuring a balanced and risk-managed approach. The strategy aims to profit from differences in carry across bond maturities.
Economic rationale
Although the fundamental reason for carry profits in bonds is not fully specified, research shows that curve carry generates significant alpha even after controlling for market factors and other strategies. Evidence suggests that combining curve carry with country carry forms a robust factor for long-short, beta-neutral bond strategies, providing a systematic source of returns.