Who Holds the Negative Carry

The carry test is back, and it has no sense of humor. An asset yields more than the money that bought it or it does not. With the 10-year Treasury at 5.22% on Thursday's close, after printing 5.354% earlier in the session, a level not seen in roughly two decades, the list of things that pass is shorter than the list that was underwritten in 2021. The interesting part is where the failures go to live. They do not vanish. They migrate to whichever balance sheet has a reason to hold them that has nothing to do with yield.

The landlord

Start with a case that landed this week, caveat attached: it comes from a short seller. Hunterbrook Media, whose affiliated fund disclosed short positions in Lennar and Millrose Properties, published a follow-up on Millrose, the REIT Lennar spun out to hold land. Since an August amendment let it buy finished houses, Millrose has been buying Lennar's. Hunterbrook counts roughly $290 million of purchases in about a month across 1,096 transaction records. More than 95% of the matched addresses were advertised for rent, and the property manager's call-center staff told its reporter there was no rent-to-own program, despite how the business was described to Goldman Sachs. Lennar's chief executive, Hunterbrook notes, is Millrose's largest voting shareholder.

The carry is the part that belongs in this newsletter. Asking rents add up to about 8.4% of purchase price, which looks fine on a napkin. After property taxes and insurance Hunterbrook gets about 5.9%, against borrowing costs of 6.5% to 6.75%. That is a building losing somewhere between 60 and 80 basis points a year before anyone fixes a faucet. Hunterbrook also estimates that in one Florida county Millrose paid about 13% more than individual buyers did, once Lennar's usual incentives are counted.

Neither company has answered Hunterbrook's requests for comment, and Hunterbrook itself grants that rent growth, appreciation or cheaper financing could still rescue the position. I am not adjudicating allegations. I am pointing at the subtraction.

The buyer with a motive

A negative-carry asset needs a holder with a reason other than yield. Hunterbrook's account supplies one: the seller. It counts 356 purchases in the final week of Lennar's fiscal quarter and says Lennar cleared the low end of its delivery guidance by just 340 homes while missing its four other targets. Lennar fell 2.9% when the first report came out. Whatever the facts turn out to be, the shape is instructive. When the market stops paying for an asset, the asset looks for the one buyer who gets paid in something else.

The state

This week offered a second version. Wolfspeed disclosed a conditional commitment from the Office of Strategic Capital: a 30-year loan of up to $1.5 billion for silicon-carbide production, with warrants that could give the government up to 7.5% of fully diluted equity. Diligence and definitive agreements are still outstanding, so none of it is cash yet. The tenor is the tell. Thirty years, on the day the Treasury sold its own 30-year paper at 5.618%, is the structure of a lender paid in strategy as well as coupon. I have no quarrel with industrial policy. I note that against a 5.6% sovereign benchmark, the buyers willing to take long, risky paper increasingly carry a flag.

The chain

The AI build-out is the same test at larger scale. Reports have Broadcom arranging more than $50 billion for its custom-chip work with OpenAI, Oracle discussing financing for a large chip purchase, and SpaceX linked to a $40 billion package for Nvidia processors. All unsigned. Thursday's lesson, when OpenAI's run rate arrived at roughly $50 billion against the $68 billion that had circulated, was how little slack a financing stack has when one input gets restated. Oracle lost 5.5% and CoreWeave 7.8%. A growth story can carry negative carry for a long time. A financing stack needs the growth to show up on schedule.

The index

Then there is the biggest holder of all. At Thursday's 7,765.36 close, the S&P 500 offers a forward earnings yield of roughly 5% by my arithmetic, about 20 basis points under the 10-year. Equity is the one asset class permitted to hold negative carry on faith, paid in expected growth. Christopher Waller expects more hikes, though not necessarily at consecutive meetings. Alberto Musalem talked about tightening over the next six to nine months. CME FedWatch has December near 71%. Faith gets more expensive when the benchmark keeps drifting up. The Nasdaq lost 1.25% on the day while the Dow rose 0.10%, which is roughly what a market sorting itself by carry would look like.

Third-quarter earnings season starts next week, and every beat will arrive with a quieter question attached: who is on the other side of the trade, and what do they earn on it?