Concealed carry

Spencer Andrews, Riccardo Colacito, Mariano M. Croce, Federico Gavazzoni

Journal of Financial Economics · 2024 · Volume 159

DOI: 10.1016/j.jfineco.2024.103874

Abstract

The slope carry takes a long (short) position in the long-term bonds of countries with steeper (flatter) yield curves. The traditional carry takes a long (short) position in countries with high (low) short-term rates. We document that: (i) the slope carry return is slightly negative (strongly positive) in the pre (post) 2008 period, whereas it is concealed over longer samples; (ii) the traditional carry return is lower post-2008; and (iii) expected global growth and inflation declined post-2008. We connect these findings through an equilibrium model in which countries feature heterogeneous exposure to news shocks about global output and global inflation.

Keywords

Yield curves, Global inflation risk, Carry trades

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