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Interest Rate Volatility Falls as Summer Carry Trades Begin

With bond traders preparing for a summer lull, quite possibly until the Jackson Hole symposium in August, there has been an increase in interest for carry trades in a bid to generate returns.

Interest rate volatility has retreated under the weight of option sales from investors betting on a calm summer, with a Cboe gauge of implied price swings falling to the lowest since March. The selling of Treasury options though so-called strangles -- a sale of an out of the money put and call option -- is one popular trade that enhances returns by collecting premiums, though it comes with the risk of uncapped losses should volatility rise.