Negative Carry | Personal Capital
Must be a valid email address.
Password must be 8-64 characters.
Must be a valid phone number.
Recession incoming? Here’s how you can prepare.
Daily Capital

Negative Carry

Are You a Victim of Your Own Negative Carry Trade?

In hedge fund speak, a “carry trade” is when you borrow money at low rates and invest in something with higher rates. The most well-known example involved the Japanese Yen—borrowing at less than 1% and buying US or European debt paying closer to 5%. Easy money. Yen appreciation was the largest risk.

As part of my job, I get to see how a lot of individuals manage their financial lives. One of the most common mistakes is inadvertently creating a negative carry. It happens when folks hold a high level of cash or extremely low paying bonds, while simultaneously carrying large debt balances. A second grader can quickly see why borrowing at 4.5% and lending at 0.5% doesn’t make much sense. But in my experience, the majority of Americans with over half of a million dollars in liquid assets are doing exactly that. Usually the debt is a mortgage, but it is not unusual to see folks maintaining significant cash and credit card debt simultaneously.

It’s been said a million times, but once more can’t hurt – if you have high interest credit card debt (anything above 8%), and you can afford to pay it off, do it. Today.

Mortgages are a little trickier. For the remainder of this article, we will discuss whether or not to prepay a mortgage, assuming the individual can pre-pay at no cost. The first question is why one is holding high cash to begin with. If it is for a known future expense, then it must remain in cash and the negative carry is simply the cost required for liquidity. Other common reasons I hear for holding large cash balances include “for when the market looks good again” or “for peace of mind”.

Those waiting for the market to look good again are usually actually waiting until the next market peak. These people are almost always better off paying down mortgage debt instead. Peace of mind is a valid thing to pay for, but it must be reasonable. A large cash balance can be nice, but if an individual has good access to credit, it is not usually necessary.

There are other variables. The magnitude of the interest rate spread is a big one. If your mortgage rate is 3.5%, it is entirely different than if it is 5%. Future interest rate expectations should also be considered. You may only be getting 1% on your cash now, but if you expect to get 6% in a few years it may be logical to eat the current cost of keeping your mortgage. Also, don’t forget the tax deductibility of your mortgage interest.

My rule of thumb is, unless you are likely to need the cash, try to avoid (or at least minimize) maintaining after-tax negative carry over 2%. Yes, interest rates could rise, but then again they might not. In the meantime, the spread is costing you real money every day. Does that mean all of your cash and low yielding bonds should be used to pay down your mortgage? Possibly, but every situation is different. It’s worth thinking it through to get it right. A few hundred dollars or a few thousand dollars a year in extra interest cost may not sound like much, but with compounding it can end up having a significant impact on your retirement.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Head of product for Personal Capital. I spent 17 years at Intuit working on Quicken,, Quicken Online and other direct to consumer financial offerings.
Icon Close

To learn what personal information Personal Capital collects, please see our privacy policy for details.

Let us know…

This year, my top financial priority is:

Building my emergency fund
Paying off high-interest debt
Budgeting better
Saving for a short-term goal, like a vacation or new car
Increasing my investment contributions
Maintaining status quo - I’ve got this under control

Make moves toward your money goals with Personal Capital’s free financial tools.