Bank of America analysts say the belief that carry trades perform particularly well during the summer has limited statistical support, with macroeconomic conditions playing a much larger role than the calendar. Historical data offer little evidence of a consistent summer decline in realised interest-rate volatility, and several of the largest carry reversals landed in August. The bank still favours carry in the near term.
The seasonal case for the summer carry trade barely shows up in the data. Bank of America analysts argue that the widely held belief carry performs particularly well over the summer has limited statistical support, with macroeconomic conditions playing a much larger role than the calendar.
The seasonal lull is hard to find in the data
The conventional summer carry argument centres on lighter trading volumes, fewer economic releases and reduced policy activity during July and August. Lower volatility lets investors collect yield from higher-returning assets without relying on large directional market moves.
But historical data offer little evidence of a consistent decline in realised interest-rate volatility during the summer. Seasonal movements occur throughout the year, and some of the largest changes appear before the summer months.
Implied volatility shows a somewhat clearer pattern, tending to fall modestly around the middle of the year before rising ahead of the autumn policy calendar. That shift remains relatively small and appears to reflect lower risk premiums rather than a genuine reduction in market uncertainty.
August has broken carry trades before
Summer months have also produced several major carry-trade reversals, including August 2007, August 2015 and August 2024. Thin liquidity can magnify volatility when an unexpected shock occurs.
Macro conditions still tilt toward carry
Current macroeconomic conditions nevertheless support a near-term preference for carry, with economic activity firm, recession concerns contained, and market risks tilted more toward reflation than contraction. Interest-rate volatility has stayed relatively stable despite markets pricing a more hawkish Federal Reserve path following higher oil prices and renewed inflation concerns. That suggests investors see the expected policy trajectory changing without viewing the broader outlook as unpredictable.
The main threat is a deeper Middle East conflict and another oil-price spike, an event that could disrupt carry strategies relying on stable growth, contained inflation and low volatility. Against that backdrop the analysts favour remaining short volatility and long carry during the summer, paired with exposure to higher forward volatility over the medium term as US midterm-election risks enter shorter-dated contracts.
Ten-year US Treasuries also appear roughly 50 basis points cheaper than estimated fundamental fair value. Positive carry and rolldown strengthen the case for holding them, with the US yield curve offering better carry value than several other developed-market bond curves.
Source: Investing.com
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