Last Updated on October 16, 2021 by Oddmund Groette
Calendar effects are pretty well known in the stock market, but perhaps not so well known in long-term Treasuries.
In this article, we look at some specific calendar effects in long-term Treasuries. We test by using the ETF with the ticker code TLT which tracks the 20 year Treasury bonds. It turns out the first seven trading days of the month produce strong negative returns, while the rest of the month has doubled the returns of buying and holding the TLT.
The calendar effect defined
Every asset has certain effects that seem to persist over time. One famous calendar effect is the end-of-month effect in stocks, for example. The few days at the end of the month have produced significantly stronger returns than the rest of the month in the stock market.
Can we find similar effects in long-term Treasuries?
The calendar effect in long-term Treasury bonds
The tests in this article are done on the ETF with the ticker code TLT – which tracks the 20 year Treasury Bonds. The test period is from 2004 until August 2021.
We tested a few variants of the calendar effect and we found two really strong effects: at the start of the month and the “rest of the month”.
Interest rates and the price of bonds
Before we continue, we give a very short primer on interest rates and bonds:
When the price of TLT is increasing, it means the interest rate is going down. If the TLT is going down, it means the interest rate is going up. The relationship between price and rates is inverse.
This is because the coupon is always a reflection of future expectations. If the buyer requires higher rates to compensate for the risk, the price needs to come down and vice versa.
Keep this in the back of your head when you read about the calendar effects below.
The end of month effect in long-term Treasuries
Just like stocks, long-term Treasuries seem to have an end-of-month effect. Because the performance of stocks is related to the interest levels we might argue the strong performance in stocks is a result of the lower interest rates.
Nevertheless, the effect has been persistent for at least almost 20 years. We test the following hypothesis:
We buy at the close on the seventh last trading day of the month. We sell at the close of the last trading day of the month. We are not using calendar days, but the trading days. They are most of the time slightly different.
The strategy returns this equity curve:
- Number of trades: 212
- CAGR 5.7%, buy and hold CAGR 6.7%
- The average gain per trade is 0.48%
- Exposure (time in the market) is 28%
- The win ratio is 61%
- The average winner is 1.58%, the average loser is 1.24%
- The profit factor is 2
These are pretty solid numbers considering the low exposure to the market.
The start of the month effect in long-term Treasuries
The end of the month shows strong returns, but how about the start of the month?
We test the following hypothesis:
We invest at the close of the last trading day of the month and sell at the close of the seventh trading day in the new month. This is all there is to it. We get the following equity curve:
- Number of trades: 212
- CAGR -4.9%, buy and hold CAGR 6.7%
- The average gain per trade is -0.4%
- Exposure (time in the market) is 33%
- The win ratio is 39%
- The average winner is 1.81%, the average loser is 1.82%
- The profit factor is 0.64
As you can see, the first days of the month have been miserable.
Is it possible to find a tradeable short strategy based on this?
We added one more parameter and we get this equity curve by being SHORT the TLT from the close of the previous month until the close of the seventh trading day of the new month:
The strategy has 175 trades and the average gain per trade is 0.54%. The CAGR is 5.2% (unleveraged) and the profit factor is 1.9.
We assume that the strategy works pretty well for diversification purposes in a portfolio of many different strategies.
- Why build a portfolio of quantified strategies (including two strategies)
- Is this the Holy Grail of trading? (The secret of Holy Grail trading strategies)
We plan to present this strategy as a monthly Trading Edge at a later stage. You can sign up via this link:
“Rest of the month effect” in long-term Treasuries
Basically, all the gains in the TLT have come after the close of the seventh trading day of any month.
Thus, let’s enter at the close of the seventh trading of the month and exit at the close of the month. This strategy returns this equity curve:
- Number of trades: 212
- CAGR 12.1%, buy and hold CAGR 6.7%
- The average gain per trade is 0.99%
- Exposure (time in the market) is 66%
- The win ratio is 67%
- The average winner is 2.4%, the average loser is 1.85%
- The profit factor is 2.7
- Max drawdown is 19%
Hence, by being invested 2/3 of the time you get double the buy and hold return.
Amibroker code for calendar effects in long-term Treasuries
If you want to get the Amibrooker code for the strategies in this article (except the Trading Edge which is a separate subscription), you can order it here:
Conclusions about calendar effects in long-term Treasuries
The results in this article confirm that there are two strong calendar effects in long-term Treasuries: the very weak performance during the first seven trading days of the month, and the opposite very strong returns the rest of the month.
Disclaimer: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinions – they are not suggestions to buy or sell any securities.