The popular market belief in a predictable "summer carry trade," where European sovereign spreads tighten, is not supported by historical data. Analysis reveals no clear trend, and the strategy only works in the absence of idiosyncratic risks, which are currently elevated due to geopolitical tensions.

The analyst advises against a simple buy-and-hold strategy for peripheral European debt. Instead, they recommend tactically trading French spreads based on 2027 election newsflow and Italian spreads around potential 2027 budget negotiation frictions, citing unattractive risk-reward at current levels.

Despite the unusual dynamics in G7 volatility, the strategist warns that for crowded high-yield emerging market carry trades, the old rules still apply. If the consensus trade is upended for any reason, EM volatility and risk reversals are expected to 'blow up,' making protective options a prudent hedging strategy.

The predictable seasonal widening of German swap spreads in June-July may not be a straightforward trade this year. The market is well-aware of this pattern, leading to pre-emptive profit-taking. Analysts advise against rushing into "widener" trades, suggesting patience until spreads potentially tighten further first.

While still profitable, FX carry trades have become more cyclical and less of a diversifier. They now exhibit a high correlation (~0.5 beta) with the S&P 500 and offer significantly lower yields (7% vs. 11-12% previously), increasing their risk profile in a potential market downturn.

Analysts express caution as EM sovereign credit spreads trade near historical lows despite a major conflict. This tight pricing creates an asymmetric risk profile, where the potential for spreads to widen significantly if recession fears mount far outweighs the potential for further tightening, presenting a poor risk-reward balance for investors.

Improving risk-adjusted carry in intra-EMU spreads is deceptive, driven by falling volatility, not higher returns. This creates a 'carry trap' where a small one-standard-deviation widening can erase one to two months of gains, highlighting the risk in currently crowded positions.

Analysts are cautious on intra-EMU carry trades because spreads are too tight. The low carry, or "skinny carry," provides an insufficient cushion against external risk-off events, which can wipe out months of gains. The advice is to await wider spreads before re-entering these crowded positions.

While broad emerging market currency indices appear to have stalled, this view is misleading. A deeper look reveals that the "carry theme"—investing in high-yielding currencies funded by low-yielding ones—has fully recovered and continues to perform very strongly, highlighting significant underlying dispersion and opportunity.