With global affairs in such a state of flux, the decades of observed performance behind the seasonality play are only so helpful. The consensus on Wall Street is that seasonality will fail this year. The median forecast in a Bloomberg survey is for yields to rise to 2.57 percent at mid-year and 2.7 percent in the third quarter.
“You cannot ignore seasonalities,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, and who’s worked in the bond market since 1978.
“But you can’t trade as a hard rule on them either,” he said. “And given all the uncertainties in 2017 on the macro, global political, and central-bank front, you don’t want to be too long and you don’t want to be too short.”
The current decade is proving an exception to the first leg of the seasonality play, with yields falling 0.12 percentage point on average during the first four months of the year, BMO data show. In the 1990s and early 2000s, average increases in the period tallied 32 basis points and 23 basis points, respectively. For all three spans, yields fell on average from early May through mid-September, by 46 basis points, 35 basis points and 32 basis points, in chronological order.
The seasonal tendency going back three decades on average, and its weakening in the past five years, can be seen using the Bloomberg Seasonality Chart, which gives the monthly change in 10-year yields in percentage points:
In the months ahead, historically bearish seasonal trends between the Treasury’s quarterly sales in February and May combined with other chart and momentum indicators signal yields will rise, according to technical analysts at JPMorgan Chase & Co.’s securities unit.
They project the 10-year yield may increase to 3 percent, a level last seen in January 2014.
David Ader, chief macro strategist at Informa Financial Intelligence, who’s been analyzing debt markets since the 1980s, says seasonals are a key driver of his yield calls. That’s partly because of structural underpinnings, including a tendency for Japanese investors to sell U.S. debt before their fiscal year-end in March, and investors buying in May after the Treasury’s debt sales.
“People always want to second guess and challenge something that frankly comes across as voodoo,” said Ader. “But the seasonals hold up and are a broad road map on how things might look.”
This article was provided by Bloomberg News.