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
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.
The combination of attractive valuations, oversold technical conditions, and the start of a strong seasonal period for bonds means now is an opportune time to be long duration.
Bond Index Returns Across Economic Regimes and Seasonal Periods
January 2000 - March 2021
Source: Guggenheim Investments, Haver Analytics, Bloomberg. Data as of 3.22.2021. Note: Total returns for the Bloomberg Barclays U.S. Aggregate Bond Index. Economic regimes identified ex ante by proprietary Guggenheim model. Strong bond seasonals are April-August. Weak seasonals are September-March.
From the Office of the Global Chief Investment Officer, Scott Minerd
By the Guggenheim Investments Macroeconomic and Investment Research Group
- Brian Smedley, Senior Managing Director and Head of Macroeconomic and Investment Research
- Matt Bush, CFA, CBE, Director and Senior Economist, Macroeconomic and Investment Research
- Jeff Traister, Managing Director and Strategist, Macroeconomic and Investment Research
Important Notices and Disclosures
Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility.
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This material contains opinions of the author or speaker, but not necessarily those of Guggenheim Partners or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results.
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