From the Collaborative Bond and Money Market Data Portal

Where It Sits in the Data Model

In the Collaborative Bond and Money Market Data Model, "Carry Trade" is not a field or an attribute. It is an investor strategy. You can see it in the data through the attributes and fields it affects:

• Currency and Distribution: Bonds issued in high-yielding currencies and sold into foreign markets, such as Uridashi, are often bought as carry trades. SSA issuers have issued in currencies like ZAR and TRY with carry investors in mind.
• Security Type: Carry positions are funded through Repo, Commercial Paper and short-dated Bills, and invested in Notes, MTNs and Bonds of longer maturity.
• Industry Sector (investor side): Most carry trading is done by hedge funds, credit strategy funds and other leveraged asset managers.

You can track issuance in target currencies with the data sheet tool, and the investors and dealers active in these currencies with the investor and dealer search tools.

Dictionary Definition

A carry trade means borrowing at a low interest rate and investing the money in a higher-yielding asset. The profit is the difference between the two rates, called the "carry." There are three main forms:

• FX carry: Borrow in a low-rate "funding currency" (historically JPY or CHF) and invest in a higher-rate "target currency" (USD, MXN, NZD or emerging-market debt TRY, ZAR).
• Curve carry: Borrow short-term (for example overnight repo) and hold longer-term bonds, earning the gap between short and long rates plus "roll-down" (the gain as a bond's yield falls while it nears maturity).
• Basis trade: Buy cash Treasuries, sell Treasury futures and finance the position in repo.

The margins are thin, so carry trades are usually highly leveraged. The main risks are a sudden rise in the funding rate, a jump in the funding currency or a spike in volatility.

1. Money Market Impact

• Repo demand: Leveraged carry and basis trades are among the largest users of repo funding. When they grow, demand for repo cash rises, which puts upward pressure on repo rates relative to the Fed's policy rate. When they shrink, that demand falls away.
• Funding-currency rates: Each rate rise in the funding currency (for example a BoJ hike) raises the cost of the "short" side of the trade directly. The 1% to 1.25% move in September 2026 cut about 25bp off the yen carry margin at a stroke.
• FX swaps and cross-currency basis: Investors who hedge their currency risk do so through FX swaps. Heavy one-way flows move the cost of borrowing dollars through swaps, which then feeds into Eurodollar, CP and CD pricing for non-US banks.
• Commercial paper and money market funds: When positions are unwound, leveraged holders sell short-term paper to meet margin calls. Money market funds then move into government paper, which widens the gap between CP and Treasury bill yields.
• Example: In August 2024, about JPY40 trillion (USD250bn) of FX carry positions unwound. The JPY rose from about 154 to 141 per dollar within days.

2. Bond Market Impact

• Target-market yields and spreads: Steady carry inflows push yields down and narrow credit spreads in higher-yielding sovereign, corporate and emerging-market debt.
• Credit spreads in an unwind: On 5 August 2024, US high-yield spreads reached 393bp, a nine-month wide. They were back to 319bp within weeks.
• Safe-haven Treasuries: On the same day the 10-year Treasury yield fell below 3.70% intraday as money moved into safe assets.
• Basis-trade unwind (March 2020):
• The 10-year yield rose 64bp between 9 and 18 March. It rose even though Treasuries are normally a safe haven, because leveraged funds were forced sellers.
• Large hedge funds sold about $173 billion of Treasuries, net.
• Sector and duration effects: Curve carry favours steep yield curves and longer maturities. When curves flatten or volatility rises, the positions with the most leverage and the longest duration are sold first. Emerging-market local-currency bonds and high-yield credit are hit hardest. Supranational and agency issuance in currencies like ZAR, TRY and MXN also sees demand fall.

3. Intermarket Linkages

• How it transmits: Cheap short-term funding (repo, CP, low-rate currencies) is turned into demand for long-dated or higher-yielding bonds. A carry trade is effectively a leveraged bridge between money markets and bond markets. A shock on either side travels to the other through margin calls and forced selling.
• Volatility feedback: Carry trades profit from calm markets. On 5 August 2024 the VIX, a measure of expected stock-market volatility, jumped from about 24 to over 65 before the market opened. The Nikkei fell 12.4% that day. The BIS found that volatility was amplified by deleveraging and margin increases.
• Risk scenarios:
• Recession: Rate-cut expectations shrink the rate differential and safe-haven currencies rise. Expect Treasury yields to fall, credit and EM spreads to widen and CP spreads to spike.
• Inflation or hawkish funding central bank: Funding costs rise and curve carry turns negative. Expect long-end selling and bear-steepening, where long-term yields rise faster than short-term ones.
• Liquidity event: Repo stress forces basis-trade sales. The 2020 precedent required about $1 trillion of Fed Treasury purchases in Q1 2020.
• What to watch:
• Funding-currency central bank meetings.
• CFTC net yen positions, which were 92,227 contracts short in the week to 1 September 2026, down from 163,412 in July.
• Repo rates relative to the policy rate.
• Cross-currency basis.
• Implied volatility in FX and rates.

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