As summer unfolds, investors in European government bonds (EGBs) are closely watching a familiar seasonal pattern—and a potential disruption to it. Historically, the month of July has offered a favorable backdrop for carry trades in European sovereign debt, but this year brings an added complexity: a notable shift in the region’s bond supply dynamics.

Seasonal Patterns in EGB Yields: A Summer Trend

Seasonal trends are an often-overlooked aspect of financial markets, yet they can provide valuable context for positioning. In the case of European government bonds, specifically the 10-year German Bund, the historical pattern has been clear: yields tend to decline in July. Over the past six years, this has been the case in five instances. Lower yields translate to higher bond prices, creating a supportive environment for carry trades—strategies where investors seek to profit from holding bonds and earning interest income while anticipating stable or improving price dynamics.

This consistent seasonal decline can be attributed to various factors, including lighter trading volumes during the summer months, reduced issuance from sovereign issuers, and a generally quieter macroeconomic backdrop. For carry-focused investors, this environment typically reduces volatility and allows them to benefit from stable or falling yields.

The 2025 Twist: A Surge in Net Supply

However, this year’s setup is not following the usual script. One key deviation is the supply side of the market. Typically, July sees a slowdown in new issuance from European governments, contributing to the supportive seasonal environment. But in 2025, the net supply of European sovereign bonds in July is expected to rise sharply compared to June, marking an unusual shift from historical patterns.

Higher net supply means more bonds coming to market than being redeemed or bought back, potentially increasing the amount of debt that investors must absorb. This can exert upward pressure on yields as supply-demand dynamics adjust. In such a scenario, the typical July rally in bond prices may face headwinds, posing risks to carry trades that rely on stable or falling yields.

Balancing Opportunity and Risk in Carry Trades

Carry trades thrive in environments where interest income can be collected without significant capital losses. Seasonal trends in July have traditionally created just such an environment for European government bond investors. But with this year’s unexpected increase in supply, the balance shifts. Investors must now weigh the familiar seasonal tailwinds against the headwinds of increased issuance.

This mismatch between historical seasonality and current supply dynamics creates uncertainty. While history suggests that July is a favorable month for EGB carry trades, the atypical supply profile could inject volatility into what is often a quiet period. As such, investors should approach carry strategies with greater caution, staying alert to shifts in demand, auction results, and broader market sentiment.

Looking Ahead: Cautious Optimism or Tactical Flexibility?

The European government bond market in July presents a nuanced picture. Seasonal patterns argue for continued carry opportunities, but the unexpected rise in net supply introduces new risks. Successful investors will likely be those who stay nimble—able to capitalize on the positive carry when conditions allow but prepared to adjust positions if supply pressures drive yields higher.

While the summer months have historically favored European bond carry trades, 2025’s market dynamics remind us that past performance is no guarantee of future results. This year, careful monitoring of supply flows and market reaction will be crucial in navigating what could be a less predictable July for sovereign debt markets.