FICC Portfolio Monthly: Dynamic pure commodity carry

Research evidence excerpt

FICC Portfolio Monthly: Dynamic pure commodity carry

Dynamic pure commodity carry

War brings no peace to long standing commodity curve carry

Commodity carry has been one of the flagship sources of commodity risk premia since

we first began utilizing the curve shape to enhance beta back in 2006 (see Global

Commodity Paper #3: The Merrill Lynch Commodity index eXtra (MLCX)). Since then, we

have analyzed several structural improvements, most recently looking at diversifying

with non-benchmark commodities and adjusting the weighting scheme, but also

broaching seasonality and dynamic versions over the past 15 years (see FICC Portfolio

Monthly: Slicing and dicing commodity carry, Commodity Portfolio Monthly: Seasonal

Risks to Curve Alpha, and Commodity Portfolio Monthly: Commodity carry for all).

In the last 3-4 years, however, both F3F0 and seasonally adjusted carry have struggled

(Exhibit 1). This came to a head in recent months, when a particularly cold winter sent

natural gas spot prices skyrocketing and F3F0 carry down 3%, followed by a further 5%

drawdown since the start of the Iran war and historic backwardation across the

commodity universe (Exhibit 2). True, while the energy shocks this year have been

unprecedented, the compression of the return profile of carry over the past few years

begs the question of whether carry still exists, and if so, whether any enhancements or

structural changes can help. Our analysis points towards the following:

• Carry has indeed compressed post-pandemic, but the perpetually backwardated

energy sector is the main culprit, reminiscent of the environment post-Arab spring

• Carry still exists but is just milder if looking outside of energy, and has been

responsible for the bulk of returns through time, rather than curve shift