libterm.com Carry yield refers to the return earned from holding an asset, typically including income such as interest, dividends, or rent, minus the cost of financing that position. It plays a crucial role in investment strategies by influencing decisions on whether to hold or sell an asset based on expected returns. Explore the rest of the article to understand how carry yield impacts your portfolio performance and investment choices.
Table of Comparison
| Aspect | Carry Yield | Roll Yield |
|---|---|---|
| Definition | Return from holding an asset due to cost of carry (e.g., interest, storage) | Return from price change when rolling futures contracts |
| Source | Interest rates, dividends, storage costs | Futures curve shape (contango or backwardation) |
| Frequency | Earned continuously during asset holding period | Realized at futures contract rollover |
| Impact on Returns | Positive when asset yields exceed costs | Positive in backwardation, negative in contango |
| Typical Examples | Interest earned on bonds, dividends on stocks | Commodity futures rollover gains or losses |
| Economic Significance | Reflects carrying costs and benefits of holding assets | Reflects market expectations and supply-demand imbalances |
Understanding Yield Concepts: Carry Yield vs Roll Yield
Carry yield represents the income earned from holding a futures contract, primarily influenced by the cost of carry, including storage, financing, and convenience yield. Roll yield arises from the price difference when rolling over a contract from a near month to a further month, reflecting market conditions like contango or backwardation. Understanding these distinct but interrelated concepts is essential for futures traders and investors to accurately assess total returns and hedge efficiency.
Definitions: What is Carry Yield?
Carry yield refers to the return earned from holding an asset due to income components such as interest, dividends, or rent, excluding any price appreciation. It represents the cost or benefit of financing a position over time and is pivotal in futures markets where it reflects the difference between spot and forward prices. Understanding carry yield helps investors assess the profitability of maintaining a long or short position in assets like commodities, currencies, or bonds.
Definitions: What is Roll Yield?
Roll yield refers to the profit or loss generated when an investor rolls over a futures contract from a near-term expiration to a longer-term expiration, influenced by the shape of the futures curve--contango or backwardation. In a contango market, roll yield tends to be negative as the price of the longer-dated contract is higher, causing losses when rolling forward, while in backwardation, roll yield is positive due to cheaper longer-dated contracts. This yield is a key component of returns in commodity futures investing, distinct from carry yield, which is derived from the cost of holding the underlying asset.
Key Differences Between Carry Yield and Roll Yield
Carry yield represents the return generated from holding an asset due to factors like interest, dividends, or storage costs, while roll yield arises from the price difference when rolling futures contracts between different maturities. Carry yield is influenced by underlying asset characteristics and financing costs, whereas roll yield depends on the futures market's contango or backwardation structure. Understanding these key differences helps investors optimize strategies in commodity trading, fixed income, and derivatives markets.
The Role of Carry Yield in Futures and Forwards
Carry yield in futures and forwards refers to the return earned from holding the underlying asset, including income such as dividends, coupon payments, or storage costs. It influences the price difference between futures and spot prices, shaping whether contracts trade at a premium or discount. Understanding carry yield is essential for evaluating the total return and risk profile of derivatives positions beyond roll yield, which arises from contract expiration and rollover strategies.
The Significance of Roll Yield in Commodity Markets
Roll yield represents the profit or loss from rolling futures contracts forward as they approach expiration, heavily impacting commodity investment returns. Unlike carry yield, which derives from the cost of holding the physical commodity including storage and financing, roll yield depends on the shape of the futures curve--contango or backwardation. In commodity markets, positive roll yield in backwardation can enhance total return, making it a critical factor for investors seeking alpha beyond spot price movements.
Practical Examples: Calculating Carry Yield and Roll Yield
Carry yield represents the income earned from holding a futures contract, such as interest or storage costs, while roll yield arises from rolling over contracts nearing expiration to maintain a position. For example, in commodity trading, if a crude oil futures contract earns a $2 premium due to storage costs (carry) and the next contract is priced $1 lower, the net roll yield is -$1. Calculating carry yield involves subtracting the cost of carry from the spot price, whereas roll yield requires analyzing the price difference between expiring and new futures contracts.
Factors Influencing Carry Yield and Roll Yield
Carry yield is primarily influenced by interest rate differentials, storage costs, and convenience yields, which determine the net benefit or cost of holding a commodity or financial instrument over time. Roll yield depends on the shape of the futures curve, where contango creates negative roll yield and backwardation generates positive roll yield, affecting returns when contracts are rolled forward. Market supply and demand dynamics, as well as inventory levels, play critical roles in shaping both carry yield and roll yield outcomes in commodity and futures markets.
Implications for Investors and Traders
Understanding carry yield and roll yield is crucial for investors and traders managing futures portfolios. Carry yield represents the return from holding an asset due to the cost of carry, such as storage or financing costs, while roll yield arises from the price difference between expiring and new futures contracts during the rolling process. Investors focused on commodities or fixed income futures must evaluate roll yield risks, as negative roll yields in contango markets can erode returns, whereas positive roll yields in backwardated markets can enhance portfolio performance.
Strategies to Optimize Carry Yield and Roll Yield
Strategies to optimize carry yield and roll yield focus on selecting assets with positive or stable carry while managing roll risks through efficient futures curve analysis. Implementing a dynamic roll schedule can enhance roll yield by minimizing losses during backwardation or maximizing gains in contango markets. Diversifying across multiple commodity or asset futures with contrasting roll dynamics further stabilizes overall returns and optimizes total yield.
Carry yield Infographic
