Summer Carry Trade Bias Lacks Statistical Support, BofA Says

The conventional wisdom that carry trades reliably perform well during the quieter summer months has limited statistical backing, with macroeconomic factors being a far more significant driver than seasonality, according to a new analysis by Bank of America.

Debunking the Summer Bias

The traditional argument for a summer carry bias centers on lighter trading volumes and fewer economic releases in July and August, which theoretically leads to lower volatility. This environment would allow investors to collect yield from higher-returning assets without facing large directional market moves.

However, Bank of America's research found little historical evidence of a consistent decline in realized interest-rate volatility during the summer. While implied volatility shows a modest dip mid-year, the analysts suggest this reflects lower risk premiums rather than a true reduction in market uncertainty.

Furthermore, the report highlights that summer months have produced several major carry-trade reversals, including in August 2007, 2015, and 2024. This demonstrates how thin liquidity can amplify volatility when an unexpected shock occurs.

Macro Backdrop Supports Near-Term Carry

Despite debunking the seasonal myth, the analysts argue that current macroeconomic conditions still support a near-term preference for carry strategies. This view is based on several key factors:

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• Firm economic activity and contained recession concerns.
• Relatively stable interest-rate volatility, even as markets price in a more hawkish path for the Federal Reserve.

This stability suggests that while investors are adjusting to a changing policy trajectory, they do not view the broader economic outlook as fundamentally unpredictable, creating a favorable environment for carry.

Key Risks and Analyst Positioning

The primary threat to this stable environment is a potential geopolitical shock, such as a deeper conflict in the Middle East leading to another oil-price spike, according to the report. Such an event could disrupt strategies that rely on stable growth and contained inflation.

In terms of market positioning, the analysts favor remaining short volatility and long carry for the summer. They also noted that 10-year US Treasuries appear approximately 50 basis points cheaper than their estimated fundamental fair value, with positive carry and rolldown strengthening the case for holding them over other developed-market bonds.