Carry Across Asset Classes

If nothing in the market moves for a year — no price changes anywhere — most positions earn exactly zero. Carry trades are the exception: they're built specifically to earn something even in that flat, nothing-happens scenario, because the return for holding is baked into the instrument itself. A high-yielding currency pays an interest-rate differential every day it's held. A backwardated commodity future pays a roll yield every time the contract is rolled forward. A steep yield curve pays rolldown every quarter a bond ages toward maturity. Cross-asset carry strategies rank instruments within each asset class by this holding return, go long the highest-carry ones and short the lowest, and repeat the same ranking rule across currencies, commodities, bonds and equity index futures at once.

What "carry" means, instrument by instrument

FX carry (see The FX Carry Trade) is the interest-rate gap between two currencies: hold Australian dollars funded by borrowing Japanese yen, and you collect the difference between AUD and JPY overnight rates every day, currency moves aside. Commodity carry comes from the futures curve's shape: if the front-month oil future trades above the contract six months out (backwardation), rolling a long position from the expiring contract into the next one locks in a gain, because you sell the more expensive near contract and buy the cheaper far one. Bond carry combines the coupon with rolldown — as a bond ages one year closer to maturity on a normally upward-sloping curve, its yield typically falls and its price rises, a gain that has nothing to do with anyone predicting rates. Equity carry is dividend yield minus the cost of financing the position, typically small and slow-moving compared to the other three.

Worked example: a two-leg cross-asset carry basket

FX leg. Suppose AUD overnight rates sit at 4.35% and JPY rates sit at 0.10%. Going long AUD/JPY funded in yen earns roughly the 4.25-percentage-point gap annualized, before any currency move — on a $10m position, that's about $425,000 a year in pure carry, collected daily as the position is marked and rolled.

Commodity leg. Suppose WTI crude's front-month contract trades at $78 and the contract six months out trades at $75 — backwardation of $3, or about 3.85% over six months, roughly 7.7% annualized. Rolling a long position captures close to that roll yield each time the near contract is replaced, on top of (or against) whatever spot oil does.

Combine the two: a carry basket holding both earns roughly 4.25% (FX) plus 7.7% (commodity) worth of pure carry per year on the respective notionals, entirely separate from whether AUD/JPY or oil actually goes anywhere. That's the appeal — carry is a return for time passing, not a bet on direction.

What erodes it

Carry's defining weakness is that it collects a steady stream of small gains and occasionally hands them all back at once. FX carry is short volatility in disguise: when risk appetite collapses, funding currencies like the yen get bought back violently as carry trades unwind, and years of 4-5% annual carry can evaporate in a week — the August 2024 yen carry unwind erased a large share of the prior year's cross-asset carry gains in a handful of sessions. Commodity carry depends on the curve staying backwardated, which itself is a market condition that flips with supply shocks. And every carry leg pays for itself slowly but loses catastrophically fast, so a naive backtest that doesn't include a genuine stress period will overstate the Sharpe ratio badly.