Bank of America analysts challenge the popular notion that carry trades inherently do better over the summer, arguing that macroeconomic forces matter far more than the calendar. Their assessment questions the idea that July and August reliably present a lower-volatility environment in which investors can harvest yield without needing large directional moves.
The traditional summer rationale rests on thinner trading volumes, a lighter schedule of economic releases and reduced policy activity during the midsummer months. In that environment, the theory goes, realised volatility falls and investors can collect yield from higher-returning assets with less risk of sharp price moves.
But the analysts find scant evidence that realised interest-rate volatility consistently drops over the summer. Instead, seasonal shifts in volatility occur at different times through the year, and some of the largest movements show up before summer begins. That pattern undercuts the premise of a predictable summer calm.
Implied volatility paints a slightly clearer but still limited picture. On average, implied measures tend to ease modestly around mid-year and then rise as the autumn policy calendar approaches. The analysts caution that the magnitude of this change is small and appears to reflect a reduction in risk premia rather than a meaningful decline in uncertainty.
Historical episodes also serve as a reminder that summer is not risk-free. The summer months have seen major carry-trade reversals, including notable episodes in August 2007, August 2015 and August 2024. Thin liquidity during these periods can amplify volatility when an unexpected shock hits.
That said, the current macro backdrop still argues for a near-term tilt toward carry strategies. Economic activity remains relatively firm, recession fears are muted, and market risks are skewed more toward reflation than contraction. Interest-rate volatility has held up at a relatively stable level even as markets price a somewhat more hawkish Federal Reserve trajectory following higher oil prices and renewed inflationary concerns.
The analysts interpret that stability as evidence that market participants expect policy paths to shift without viewing the overall outlook as highly unpredictable. Embedded in the commentary are several concrete positioning suggestions: maintain a short-volatility and long-carry stance over the summer while adding exposure to higher forward volatility in the medium term as US midterm-election risks move into shorter-dated contracts.
They also flag a specific valuation observation on sovereign debt. Ten-year US Treasuries appear to be trading roughly 50 basis points cheaper than their estimated fundamental fair value. Positive carry and rolldown provide support for owning these securities, and the US yield curve currently offers more attractive carry than several other developed-market bond curves.
Finally, the analysts identify the principal threat to this constructive carry view: a deeper escalation in the Middle East and a consequential oil-price spike. Such an event could upset strategies that assume stable growth, contained inflation and low volatility, turning thin summer liquidity into a source of sharper market moves.
LCO-3.88% CL-2.14% GB10YT=RR-1.35% US10YT=X-0.51% JP10YT=XX+1.44% CA10YT=RR-1.02% TNX-0.51% - these intraday moves reflect the cross-asset context underpinning the analysts' stance.