- funding gap that occurs when interest earned on a loan is less than lender's cost of funds. Also called negative cost of carry. Though rare today, such a situation occurred in the early 1980s when mortgage lenders were financing fixed rate mortgages at rates below rates paid depositors on six-month certificates of deposit. In many states, lenders were restrained by usury ceilings from charging higher interest rates.
- situation where the net yield on a dealer's inventory, or a mortgage banker's loan portfolio, is less than the interest rate paid to finance the assets owned. For example, a bond yielding 10% purchased with funds borrowed at 12%. The opposite is positive carry CARRY. Also called negative cost of carry.See also negative authorization.
situation when the cost of money borrowed to finance securities is higher than the yield on the securities. If an investor borrowed at 12% to finance, or "carry," a bond yielding 10%, the bond would have a negative carry.
situation in which the cost of money borrowed to finance securities or financial futures positions is higher than the return on those positions. For example, if an investor borrowed at 10% to finance, or "carry," a bond yielding 8%, the bond position would have a negative carry. Negative carry does not necessarily mean a loss to the investor, however, and a positive yield can result on an aftertax basis. In this case, the yield from the 8% bond may be tax-exempt, whereas interest on the 10% loan is tax-deductible. In commodities, this would occur in any month in a backwardation where the price is higher than the spot month. With the negative carry, if the investor holds the physical position in copper, for example, it will continue to lose value.
