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Best of Time, the Worst of Times for T-bonds

Kaeppel's Corner: The Best of Time, the Worst of Times for T-bonds

Jay Kaeppel, Optionetics.com
March 1, 2011

Last week I wrote about gold and gold stocks, so this week let’s take a look at bonds, specifically treasury bonds – you know, those bastions of financial strength backed by the full faith and credit of the United States Federal Government. Hey, stop laughing!

If you have read my stuff in the past then you know that I am something of a ”seasonal/cyclical” guy when it comes to the financial markets (although my wife keeps assuring me that “we’re going to get you the help that you need.” But I digress).

In any event, it is a little known fact (so don’t let this get out) that the bond market is one of the most reliably “seasonally cyclical” markets around. So let’s take a closer look.

For our testing purposes we will use the near month Treasury bond futures contract. For this contract, each point is worth $1,000. So:

-If we are bullish and the price rises one point we gain $1,000.

-If we are bullish and the price declines one point we lose $1,000.

Likewise, or I guess I should say, inversely:

-If we are bearish and the price rises one point we lose $1,000.

-If we are bearish and the price declines one point we gain $1,000.

The Worst Months

Figure 1 displays the gross dollar return achieved holding a long position in t-bond futures only during a given month every year since November 1977.

Figure 1 – T-bond futures Monthly Gain or Loss (1977-2011)

As one would expect, some months show gain and other show losses. This would be true of any market. What is interesting and of greater importance is the consistency of bullish and/or bearish returns for a given month or group of months. In Figure 1 we can see that the first four months of the year have all shown cumulative losses over the past 33 years.

Figure 2 displays the cumulative results achieved by holding a long position in t-bond futures during January, February, March and April each year since 1978.

Figure 2- T-bond performance January through April (1978-2011)

As you can see, between January and April sometimes bonds rally, sometimes they fall but the long-term trend is fairly obvious. Again, the most compelling thing to note is the consistency of the negative performance during this four month period. Now since I call myself a “professional market analyst”, you would naturally expect me to launch into an intelligent discussion explaining in fascinating detail why in the heck bonds tend to perform so poorly early in the year. And I fully intend to do so. Someday. Just not this particular day. So if you are wondering why bonds tend to decline during the first four months of the year, for now I will have to go with my stock answer of “Let me get back to you on that.”

The Best Months

As you can see in Figure 1 the best performing months for T-bonds have been May, June, August and November. Now again, the cynical first thought might be to assume that “hindsight is 20/20.” Given that I am now wearing tri-focals and that nothing is ever in focus, I can’t comment directly. Nevertheless, I once again wish to point out the importance of “consistency” (which to my credit is something I am very consistent about doing).

Figure 3 displays the performance achieved by holding a long position in t-bonds during May, June, August and November every year since 1977.

Figure 3 - T-bond performance during May, June, August and November (1978-2011)

The key thing to note here is that had you discovered this trend say five years ago, you could have exploited it profitably for the past five years. Likewise, had you discovered it 10, 15 or 20 years ago you could have made money from this trend.


So are T-bonds destined to languish and/or decline between now and the end of April. And will that “inevitable decline” be followed by a “robust rally” during May and June? Alas, the answer – despite everything I’ve presented here – is “who knows?” There are no “sure things” when it comes to “seasonal/cyclical trends” (with the sole exception being that we can state with certainty that people will drink green beer on St. Patty’s Day). Still, a close look at Figures 2 and 3 suggest that it might make sense to give these seasonal trends the benefit of the doubt.

As always, time will tell.

Jay Kaeppel
Staff Writer and Author of “Seasonal Stock Market Trends”

Optionetics.com ~ You’re Options Education Site


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