Is the Carry Trade a Diversifying Strategy?

Only if you have zero equity exposure.

October 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • The carry trade was positive across most asset classes in YTD 2022
  • The correlations to the S&P 500 were low historically
  • However, the carry trade crashed when stocks crashed, ie provided limited diversification benefits


After a few years in unchartered territories, most bonds have normalized by showing positive yields again. Naturally, this implies that almost all bonds will have lost in value this year. Although painful, monetary tightening is required to fight inflation, and it increases the expected return of fixed-income securities, at least in nominal terms. 

Higher bond yields do not only make single securities more attractive, but also related strategies such as the carry trade. For example, the U.S. 10-Year Treasury bond is yielding close to 4%, compared to 0% for the Japanese equivalent. Given that the JPY has been trading consistently lower against the USD since 2020, this makes the trade all the more alluring, and has become a feedback loop. 

Some investors argue that almost all capital market activity can be explained by the carry trade as that continuously shifts capital through the global economy, mostly seeking high returns, but occasionally also safety and security. However, although the carry strategy is well-researched and can be applied across asset classes, it has not performed well in recent years (read Don’t Get Carried Away by Carry).

In this research article, we will explore the performance of carry strategies and their use case for portfolio diversification.


We use indices from Societe Generale in this analysis, which highlight the excess returns for carry strategies across four major asset classes. The portfolios are constructed by going long high-yielding securities and shorting low-yielding ones. For foreign exchange (FX), bonds, and equities this requires bond and dividend yields, while in commodities the differences between spot and forward prices are used for security selection.

We observe that the performance of carry strategies across asset classes has been poor sinc