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I understand that the carry of a steepener trade is the cost of financing the position e.g. the rate you are receiving on your short-end long, net the rate you are paying to short the long-end. However, what is the carry of an outright long position? A report reads:

"I continue to favor steepeners as a core representation of my strategically bullish view: steepeners trade like a long-duration exposure, but with a better carry profile, and should be supported by rising term premium..."

what exactly does this mean? For reference, the steepeners being talked about are 5s/30s in the US treasury market.

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    $\begingroup$ 5s30s is correlated with being long the market. The author is saying its a cheaper way to be long. $\endgroup$
    – user68819
    Commented Sep 13 at 6:18

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I might not have understood correctly, but this sounds more like the price of the curve trade rather than the carry. On this note, yes, a 5s30s steepener will be cheaper than a 30y payer outright.

"the rate you are receiving on your short-end long, net the rate you are paying to short the long-end."

I would think the carry in the report you read has a different definition. The carry for a (assumed) 6m horizon is the certain payment that is earned during that period.

Using your 30y paid position as an example, and using the notation R(term, tenor), the 6m carry on it is $$ Rate(0, 30y) - Rate(6m, 29.5y) $$

If the curve is upward sloping just prior to the 30y point, then your carry on the 30y payer position is negative. The report you have implies that a 5y receiver position has positive carry, so that makes the carry of the steepener position less negative than the outright. I don't have actual numbers with me, but you can plug the values into the formula above to calculate the actual carry values to validate the report's claim.

Note that the formula is for a payer position, for a receiver position it's the forward minus spot.

Related to carry is the roll down, and sometimes they're bundled together commonly as carry + rolldown, though some sources may just refer to it as carry so you might have to look out for any footnote or definitions that are set out by the author.

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  • $\begingroup$ Fwiw I'd add roll down as well. $\endgroup$
    – user68819
    Commented Sep 13 at 17:50
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    $\begingroup$ Thanks! Have appended that as they're commonly used hand-in-hand. $\endgroup$
    – Nigel
    Commented Sep 13 at 17:53
  • $\begingroup$ @Nigel But if Rate(0,30y) - Rate(6m, 29.5y) < 0, what does this mean in practice? In what sense is it a "loss"? $\endgroup$
    – Charles
    Commented Sep 14 at 2:23

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