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The 2 year Treasury note yields ~4.9% in the cash market as of 29 Aug 2023.

Assume implied cost of financing of 5.5% pa (3 month T-bill rate) to finance a long futures position.

This results in a negative carry of ~0.6% pa if the world does not change.

The 3 and 5 year Treasury note futures also have a negative carry based on the same reasoning. And they have a negative roll down return since the yield curve is presently downward sloping from 2 year tenor to 10 year tenor.

Have I understood correctly that anyone who holds a long 2 year Treasury note futures position suffers a negative carry and will lose money if the world does not change? (same applies for long 3 and 5 year Treasury notes)

Meaning to say, the carry, expected return as well as actual P/L are all negative if the world does not change.

If yes, how is it possible, from an expected returns perspective, that there are still longs in this market? (aside from speculators who are hoping rates will fall)

Thanks in advance and apologies for ignorance.

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That's like saying, when the curve is upward sloping, why is anyone ever short ? Also, futures don't have carry, only roll down by definition.

Carry pnls for cash are realised if fwds are realised - so if the fwds are realised at term, yes these long cash positions should lose money. Roll down is for an unchanged spot curve.

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  • $\begingroup$ Thank you for correcting my terminology. Now the 2 year T-note futures is upward sloping. Based on this term structure, the long futures roll return for this contract is negative -i.e. the position loses money (P/L viewpoint) from the negative roll. Assumption being the futures term structure is unchanged. Given the above, anyone holding a long futures position MUST expect the term structure to change, otherwise they would not be long a 2 year T-note futures contract now - correct? I.e. the ONLY reason for going long now is the expectation rates will fall - right? $\endgroup$
    – craftcase
    Commented Sep 5, 2023 at 16:20
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    $\begingroup$ It can be for a number of reasons. I.e. People might be long cash or futures and paid swaps. They could also be long 2y and short 10y where maybe the roll is more palatable. But yes, they could also just be long outright 2y, with a view that the capital appreciation will be higher than their roll, to term $\endgroup$
    – user68819
    Commented Sep 5, 2023 at 17:10
  • $\begingroup$ Thank you for the helpful perspective, appreciate it! $\endgroup$
    – craftcase
    Commented Sep 6, 2023 at 10:32
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As mentioned by @user68819, the correct terminology for returns from rolling down the futures term structure futures is roll return and not carry.

The points below are a summary of @user68819's comments. Posting them in the form of an answer for easy reference.

Currently, the term structure for 2 year T-note futures (ZT) is upward sloping, indicating a negative roll return and also negative P/L assuming the world remains unchanged. One to two years ago, it was downward sloping, the opposite.

Despite the negative futures roll return (and negative rolldown return from the downward sloping Treasuries yield curve at present), there are still good reasons for longs to hold ZT.

  1. An outright long may expect rates to fall (as the dot plot currently suggests). And capital appreciation > the loss from futures roll + loss from rolldown yield curve. All this whilst providing a hedging service to the portfolio against a recession.

  2. One could be long ZT and short another longer tenor bond as part of a long-short position (with positive carry).

  3. As a hedge against some swap position that is concurrently held.

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