Summer Carry and Seasonality in UK Rates

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Summer Carry and Seasonality in UK Rates

IdeaMIn SONIA spot, the 10y–15y sector screens as the most attractive area from a carry-and-

roll perspective, including on a volatility-adjusted basis. The 10y point offers around

3bp/3M of carry and roll, with a C&R/Vol ratio of around 0.12x.

In SONIA forwards, the 5y5y sector stands out as the cleanest carry-and-roll expression,

followed by 4y2y. The 5y5y offers around 4bp/3M of rolldown and a roll-to-vol ratio of

around 0.17x, while 4y2y offers around 3bp/3M and a roll-to-vol ratio of around 0.13x. This

leaves the belly/intermediate forward space looking more attractive than the long end for

carry-oriented longs.

Gilts currently offer a more attractive carry-and-roll profile than swaps, particularly at the

front end. This makes ASW wideners look compelling from a carry-and-roll perspective,

especially once volatility is taken into account. The 3y and 7y ASWs are the standout

points, offering around 5bp/3M and 3.5bp/3M of carry and roll, respectively, with C&R/Vol

ratios above 1x.

We also analyze different types of steepeners, flatteners and flies. Compelling carry

trades typically require favorable carry relative to realized volatility, which makes curve

spreads and flies the most natural candidates. For each selected strategy, we report six-

month correlations versus the first and second PCA factors, computed separately for

SONIA spot outrights and SONIA forward outrights. This helps identify how each spread

or fly is exposed to broader level and curve-shape factors, and therefore how it can be

used to express a specific rates or curve view.

Exhibit 3 and Exhibit 4 compare the evolution of the first and second PCA factors with

representative outright and curve trades. PCA1, computed separately on SONIA spot and