Negative Carry
Negative Carry refers to a financial situation in which the cost of holding an Asset exceeds the income generated by that Asset. This typically occurs in investments where the Interest Rate on borrowed funds is higher than the yield on the Asset itself.
Examples:
- Real Estate Investment: An investor purchases a rental property financed through a mortgage with an Interest Rate of 5%. If the rental income is only 3%, the investor experiences a negative carry of 2%.
- Bond Investment: An investor buys a bond that yields 4% but finances the purchase with a loan that charges 6% interest. The investor faces a negative carry of 2%.
Cases:
- Commodity Futures: If an investor holds a futures contract for a commodity and the cost of storage and insurance exceeds the profit from selling the commodity, this can result in negative carry.
- Currency Carry Trade: An investor borrows in a low-yield currency to invest in a high-yield currency, but if the Interest Rate on the borrowing exceeds the yield from the investment, it leads to negative carry.