Don’t Look Now, But Bond Seasonality Is Turning Bullish

The seasonal pattern of stock market returns has made “Sell in May” a common refrain, but we find that seasonal patterns also exist in the bond market. The summer months, which tend to see weaker-than-average stock returns, also tend to deliver stronger-than-average returns for bonds.

The chart below shows the monthly change in 10-year Treasury yields relative to the trend of each year. After all, a 10 basis point monthly decline in yields wouldn’t tell you much about seasonality in a year that saw yields decline 120 basis points. Focusing on data during the 2010-2019 expansion (to avoid recession distortions), we find that 10-year yields tended to rise during the September-March period and fall during the April-August period, relative to the trend of each year.

The cumulative median yield change during the bullish months was -30 basis points, versus +30 basis points in the bearish months. We also see a bullish skew in the distribution, with the largest monthly yield decline during the bullish months reaching -59 basis points, compared to +27 basis points for the largest increase.

Most Bullish Seasonal Period For Treasurys Runs From April Through August

Monthly basis point change in 10-year yields relative to full-year trend, 2010-2019

The Fed's Optimistic Neutral Rate Projection Is Almost Fully Priced In

Source: Guggenheim Investments, Haver Analytics. Data as of 3.23.2021. Note: Monthly average constant maturity 10-year Treasury yield. Interquartile range is shown here as middle four observations out of ten.

This seasonal pattern also shows up in the performance of the Bloomberg Barclays US Aggregate (Agg), the most widely used benchmark for the broad U.S. bond market. The scatter plot below shows annualized total returns and volatility for the Agg since 2000, broken into different economic regimes and seasonal patterns. Unsurprisingly, Agg returns have been the highest in weak economic regimes. In strong economic regimes, which is where we find ourselves now, the strong seasonal period for bonds (April-August) delivered significantly higher total returns than the weak seasonal periods.