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I am still confused regarding the differences between upfront and running. If two bonds have a spread of 50bp, does that equate to 50bp in total return over the course of the year or do I have to multiply 50bp by the duration effect.

Sometimes I mix up the two and don't know which space I'm in.

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Bps running and bps upfront are used so that notional amount doesn't need to be referenced, and "bps upfront" is just "bps running" multiplied by DV01 (not modified duration).

For example, a 10-year bond currently has a DV01 of roughly 9. Then "1 bp running" for this bond is equivalent to "9 bp upfront". If the notional amount is \$100 million, then the total dollar risk is $9 \text{ bps} \times \text{100 million} = \$90,000$.

Carry and roll for bonds/swaps are usually quoted in "bps running" terms over a specified horizon. If a bond's RD&C (rolldown + carry) is $x$ bps running over 3 months, it means that your expected P&L from carry and roll will be $x \text{ bp} \times \text{PV01}$ over three months. Continuing with our 10-year bond example, its RD&C is currently about 4.4 bps running, or 39.6 bps upfront, or \$396,000 for 100 million notional. Note that we don't usually annualize carry and roll statistics when we report them, so these are expected P&L over the specified horizon (3 months in this case).

Also note that bps running is bond specific, "1 bp running" would equate to "$x$ bp upfront" depending on a bond's risk. So the simple yield spread between two bonds is neither bps running nor bps upfront. Typically we'd calculate the carry/roll for each bond and then take the difference. The result would be considered a "bps running" concept and you'd implement a spread trade in a DV01-neutral way (i.e., you'd scale the notionals on the two bonds so that their DV01s are identical).

Let's use a real life example: 10-year bond yield closed at 2.17% today while 30-year bond yield closed at 2.75%, a yield spread of 58 bp. If we implement a duration-neutral spread trade (say short 2.27 units of 10-year bond against each unit of 30-year bond), the 3-month carry of the trade would be $1.9-2.7 = -0.8$ bp running and the 3-month rolldown is $0.1 - 1.7 = -1.6$ bp running.

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  • $\begingroup$ Thanks, sounds like bp running is a frame of reference for discussion but bp upfront is your actual P&L. So someone that says a bond has 10bp of carry and roll down earns more than a bond with 5bp of carry and roll down is inaccurate until you incorporate the DV01 effect and convert it to bp upfront terms. $\endgroup$
    – VanillaCall
    Commented Aug 26, 2017 at 12:13
  • $\begingroup$ I have never really heard this terminology for bonds. Mostly it applies to quoting conventions for CDS and similar credit derivatives. $\endgroup$
    – Dom
    Commented Aug 26, 2017 at 12:45
  • $\begingroup$ Helin - I found this incredibly helpful, thank you. Is it fair to say then we can think of R&C stated in running terms as the breakeven change in yields that would wipe out your PNL in basis points X nominal (aka carry in upfront terms)? Would it be possible to get an expanded example above showing some nominal P&L comparisons between two different scenarios? Thank you! $\endgroup$
    – BD123
    Commented Oct 25, 2019 at 16:00

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