Negative Carry Explained: Impact on Australian Investors in 2025

Rising interest rates, volatile markets, and a shifting global economy have put ‘negative carry’ front and centre for Australian investors in 2025. Whether you’re a property investor, bondholder, or currency trader, understanding negative carry has never been more important. Let’s break down what negative carry means, why it matters now, and how to navigate its risks in today’s investment landscape.

What Is Negative Carry?

Negative carry occurs when the cost of holding an investment—typically through borrowed funds—exceeds the income generated by that investment. It’s the financial equivalent of paying more for a privilege than you get in return. For example, if you borrow at 6% to invest in a property that yields 4%, you’re in negative carry territory, losing 2% on the spread before considering other expenses.

Negative carry isn’t just a theoretical risk. In 2025, with the Reserve Bank of Australia (RBA) maintaining a cash rate above 4.5% to combat persistent inflation, many traditional yield strategies are under pressure. Investors are having to rethink how they manage cost versus return.

Where Negative Carry Hits Hardest in 2025

Several asset classes are feeling the sting of negative carry this year:

• Property Investment: Higher mortgage rates mean rental yields often lag behind interest costs, particularly in Sydney and Melbourne’s inner suburbs where property prices remain high but rents have plateaued.
• Government and Corporate Bonds: With bond yields lagging behind borrowing costs, leveraged bond strategies are less attractive. For instance, 5-year Australian government bonds are yielding around 3.7% as of April 2025, well below typical margin lending rates.
• FX and Carry Trades: The classic ‘Aussie carry trade’—borrowing in low-yielding currencies to invest in AUD assets—has become riskier as global rate differentials narrow and the AUD faces downward pressure from slowing Chinese demand.

Even traditionally ‘safe’ strategies have become susceptible to negative carry as funding costs outpace returns. This shift is driving a more cautious approach among both retail and institutional investors.

Strategies for Managing Negative Carry Risk

Smart investors are adapting with a blend of defensive tactics and targeted risk-taking:

• Focus on Positive Cash Flow: In property, buyers are increasingly prioritising cash flow-positive investments, even if capital growth prospects are muted.
• Repricing and Renegotiation: Savvy borrowers are locking in fixed rates or renegotiating loan terms to reduce interest costs.
• Selective Asset Rotation: Investors are rotating into sectors with higher yields, such as infrastructure or defensive equities (utilities, healthcare) that offer stable dividend streams above borrowing rates.
• Active Portfolio Management: With negative carry eroding returns, passive ‘set-and-forget’ strategies are less appealing. More Australians are taking an active approach—rebalancing portfolios, trimming leverage, or seeking alternative income sources.

It’s also worth noting that the 2025 Federal Budget introduced targeted tax incentives for build-to-rent developments, which may help offset some negative carry for investors in the property sector. However, these incentives are tightly focused and not a panacea for all negative carry scenarios.

Real-World Example: The Apartment Investor’s Dilemma

Consider a Melbourne investor who bought a two-bedroom apartment in 2022 for $700,000 with an 80% loan at a fixed 2.5% rate. In 2025, the fixed period expires, and their new variable rate jumps to 6%. Rental income, however, has only increased marginally, and after costs, their net yield sits at 3.8%. This investor now faces a negative carry of over $3,000 a year—prompting tough decisions about holding, selling, or refinancing.

This scenario is repeating across the country, particularly in markets where rental yields are struggling to keep pace with rising interest rates. Investors who entered the market during the low-rate era are being forced to reassess their strategies as negative carry bites into their cash flow.

Is Negative Carry Always Bad?

Not necessarily. Some investors deliberately accept negative carry for the potential of capital gains or currency appreciation. But in a high-rate, low-growth environment like 2025, the margin for error is razor-thin. The key is understanding your risk tolerance and ensuring you’re not betting the farm on a turnaround that may take years—or never arrive.