BofA: Vol. Vacuum Favors Summer Carry

Bank of America note that “implied vol. across markets has fallen sharply. Drivers for the vol. drop include resilient global data, slower global central bank tightening cycles, some signs of slowing inflation, and a defensively positioned market.”

• “A hawkish but slower Fed + lower vol. reinforces three of our core rates views: 1) remain underweight front end, 2) trade duration and recent 10-Year range with a tactical long bias, and 3) position for a flatter 2s10s curve.”
• “The current Fed stance + a strong but slowly moderating economy should reinforce relatively range-bound trading into the summer and Q3.”
• “Our preferred carry expressions are: vol surface normalization, long 2-Year swap spreads, short 2-Year outright, and yield enhancement across assets.”