Calendar Effects In Long-Term Treasuries (TLT Seasonal Trading Strategy)
Last Updated on May 12, 2023
Calendar effects are pretty well known in the stock market, but it’s not many articles out there about calendar effects in long-term Treasuries (TLT). TLT seasonal trading strategies are hard to come by on the internet, but below you get some ideas where to go.
In this article, we look at some specific calendar effects in long-term Treasuries. We backtest some calendar effects 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.
What is a calendar effect?
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 backtests 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 powerful effects: at the start of the month and the “rest of the month”. Thus, TLT seasonal trading strategies are probable.
Bond trading video
We have made a video that contains four specific bond strategies (including trading rules):
Interest rates and the price of bonds
Before we continue, we give a concise primer on interest rates and bonds:
When the price of TLT increases, it means the interest rate is going down. If the TLT is going down, the interest rate is going up. The relationship between price and rates is inverse.
- What Happens To Stocks When Bonds Go Up? (Trading Strategy Backtest)
- What Happens To Stocks When Bonds Go Down? (Trading Strategy Backtest)
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 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 month’s last trading day and sell at the close of the seventh trading day of 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 well for diversification purposes in a portfolio of many 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
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.
List of trading strategies
We have written over 800 articles on this blog since we started in 2012. Many articles contain specific trading rules that can be backtested for profitability and performance metrics.
The trading rules are compiled into a package where you can purchase all of them (recommended) or just a few of your choice. We have hundreds of trading ideas in the compilation. You also get the code for the strategies mentioned in this article.
The strategies are taken from our list of best trading systems. The strategies are an excellent resource to help you get some trading ideas.
The strategies also come with logic in plain English (plain English is for Python traders).
For a list of the strategies we have made, please click on the green banner:
These strategies must not be misunderstood for the premium strategies that we charge a fee for:
Conclusions about calendar effects in long-term Treasuries
This article’s results confirm two strong calendar effects in long-term Treasuries: the very weak performance during the first seven trading days of the month and the opposite solid returns the rest of the month. Thus, it’s possible to develop TLT seasonal trading strategies.