http://financial-dictionary.thefreedictionary.com/Carry+Trade Carry Trade A trade where you borrow and pay interest in order to buy something else that has higher interest. For example, with a positively sloped term structure (short rates lower than long rates), one might borrow at low short term rates and finance the purchase of long-term bonds. The carry return is the coupon on the bonds minus the interest costs of the short-term borrowing. Of course, if long-term interest rates unexpectedly rose(and long-term bond prices fell as a result), the carry trade could become unprofitable. Indeed, if this occured, there could be a number of investors trying to unwind the carry trade, which would involve selling the long-term bonds. It is possible that this could exacerbate the increase in long-term interest rates, i.e. push the rates even higher. “if long-term interest rates unexpectedly rose(and long-term bond prices fell as a result), the carry trade could become unprofitable.” if the trader is borrowing the lower interest FC and buying the bonds that yield a higher interest rate, wouldnt he want the bond rate to go up?
Not after we’ve purchased the bonds. Interest rates go up, bond prices go down - we borrowed at a short term rate so our cost of borrowing will go up at the same time as our bonds take a hit - one of the reasons that funding long term investments with short term assets is usually a bad idea.