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Abstract
Earning carry to enhance portfolio performance is a core theme for many fixed-income portfolio managers. In this article, the authors analyze the historical performance of five different carry strategies—yield curve, credit curve, liquidity, FX, and volatility carry—in various currencies over the past six years and suggest ways to combine these strategies to earn optimal risk-adjusted returns in fixed-income portfolios by constructing an efficient frontier.The results of the authors’ research indicate that 1) earning liquidity or volatility carry is alone unlikely to significantly improve portfolio returns, 2) moving up the yield curve and down the credit curve are key sources of carry in fixed-income portfolios, 3) diversifying across carry strategies should significantly improve the average information ratio, and 4) diversifying across currencies within a carry strategy is unlikely to result in significantly reduced risk.
TOPICS: Fixed-income portfolio management, in portfolio management, analysis of individual factors/risk premia
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