What is carry in fixed income?
When we buy a bond that receives a positive coupon regularly and hold it in the portfolio, we see how, over time and even without changes in the bond’s price, the portfolio’s value creases.
This increase is the result of coupons that the bond pays into the account regularly. This increase is called carry from the investment.
At present, in a fixed-income universe where many bonds offer negative carry, we believe having positive carry is essential for investors not to suffer significant equity erosion over time as a consequence of increased inflation.
How to look for positive carry in an intelligent way?
In this zero-rate environment, investors might see a good opportunity to buy three or four corporate bonds that receive a high coupon.
However, after the emergence of the current post-Covid-19 economic crisis, we can expect corporate default rates to remain high for a few years. Therefore, investors who did not diversify their investment could see how two or three of the bonds they bought end up not being paid, which would mean a strong loss of their assets.
To avoid that risk, it might be interesting to search for positive carry through more diversified investment in vehicles that manage bonds from hundreds of companies to minimise the risk of default of specific issuers.
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