BofA: Careful Carry Vs Hedging Risks

Bank of America note that U.S. rates have been driven by two key themes in recent sessions, “moderating economic data vs shifting election sentiment.” They “encourage clients to overweight macro data vs recent political noise.”

• BofA go on to suggest that those factors are “likely to leave the market in a carry context near-term, but more cognizant of the potential for the structurally supportive backdrop for carry to shift as the market moves from pricing the risk around the elections to pricing specific outcomes as we approach the event.”
• They recommend “staying in carry strategies near-term but hedge tail risks, particularly the right-side tail.”
• In greater detail, they believe that “the fwd vol position may be expressed directionally: long intermediate OTM payers partially financed by selling shorter expiry OTM payers.”