Breakeven Analysis for Rates Trades

A trader who buys a bond isn't just betting on where yields end up in three months — they're also earning carry and rolldown every day they hold the position, win or lose on the yield call. That daily income cushions against adverse yield moves, so the real question isn't "will yields fall," it's "how far would yields have to rise before this trade loses money despite the income it earns along the way." That threshold yield move is the trade's breakeven.

Setting it up

Carry is the income from holding the bond versus your funding cost; rolldown is the price gain from the bond "rolling down" a normally upward-sloping curve as time passes and it becomes a shorter-maturity bond. Add them together and you get total expected return assuming yields don't move at all. Converting that dollar or price return into an equivalent yield change, using the bond's DV01 (dollar value of a one-basis-point move), tells you exactly how many basis points the yield can rise before your gain from carry and rolldown is fully offset by the price loss from higher yields.

$$\text{Breakeven (bp)} = \frac{\text{Carry} + \text{Rolldown (in price terms)}}{\text{DV01}}$$

In words: take your total expected income over the holding period, expressed in price points, and divide by how much the bond's price moves per basis point of yield — the result is the number of basis points yields can rise against you before the trade breaks even.

Worked example

A trader holds a 10-year note with a DV01 of $0.085 per $100 face (i.e., a 1bp yield rise costs 0.085 price points). Over the next three months, expected carry is 8bp of yield-equivalent income and rolldown adds another 4bp, for a total of 12bp of expected return if yields stand still. Converting that 12bp into a breakeven move: since the position's total cushion is 12bp of yield-equivalent income, and price sensitivity is roughly linear near current yields, the breakeven is approximately a 12bp rise in the 10-year yield. If the 10-year sells off by 8bp over the quarter, the trader still profits, because carry and rolldown covered that move with 4bp of cushion left over. Only a selloff beyond 12bp turns the trade into a net loss.

Worked example: curve trade breakeven

Now consider a 2s10s steepener (short the 2-year, long the 10-year, DV01-weighted to be duration neutral). The 2-year carries at 5bp positive to the trader (short a bond in a normal curve typically forgoes carry, so here suppose funding dynamics net to +5bp) while the 10-year leg costs 3bp of negative carry, for a net breakeven cushion of 2bp of curve flattening the trader can absorb before the trade loses money, holding all else equal. Because curve trades are financed on both legs, breakeven analysis has to net the carry from each leg rather than just looking at outright yield-level carry.

What this means in practice

Breakeven analysis is how rates desks size conviction against cost of carry: a trade with a wide breakeven cushion can be held through modest adverse moves without panic, while a trade with a thin breakeven (or negative carry) needs the yield call to be right almost immediately or it starts bleeding. It's also how portfolio managers compare ostensibly similar trades — two steepeners with the same duration exposure can have very different breakevens depending on where on the curve the legs sit.