Hi Damien and Carl

Does anyone want to talk about the best ways to calculate carry and roll down effects for Government bonds, Credit bonds and inflation linked bonds?

many thanks

Perhaps I can contribute to this.



Carry and roll-down effects are what generate return in fixed income portfolios when there are no changes in the yield curve – if you like, it’s just the interest paid on the investment in the form of accrued interest or coupon. This return is higher for higher-yielding credit bonds (=lower rated), since the market demands that a riskier investment must pay a higher return.



Carry (also called yield) return over an interval is closely approximated by the bond’s yield to maturity, times the length of the interval.



If you want to calculate this more accurately you can reprice the security at the start and end of each interval with a single yield. (This will also take into account, for instance, pull-to-par effects when the bond’s maturity is reaching zero, at which point the price must converge to par – in this case the bond’s price may go up even if interest rates increase).



Roll-down return is a little more complex. What usually happens in the fixed income world is that the yield curve slopes upwards, so that longer rates are higher than shorter rates. In this case if we buy a bond with 2 years maturity (say) and hold it for six months, and if the yield curve doesn’t move (a big assumption), then the bond will have 1.5 years maturity and its yield as read off the curve will be correspondingly less. Since the yield has fallen, the price will have increased and return will have been generated. It’s called roll-down because we have ‘rolled down’ the yield curve.


Regards

Andrew Colin

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Andrew Colin is one of the world's leading authorities in performance analytics, for more information visit Moderators

Hi Andrew / Carl


So for a Credit Bond, are you saying that if I calculated a return using the daily "yield to worst" and then added a carry return using the static spread over swaps (LOAS or ASW), I would be double counting the accrual effect?

Regards.