Long-Term Treasuries Calendar Effects: TLT Seasonal Trading Strategies

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.

At the end of the article, you find the whole Python code for the two strategies in this article.

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.

calender-effect-in-tlt

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.

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.

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 and make the following trading rules:

Trading Rules

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The strategy and its trading rules return this equity curve since TLT’s inception until today:

End of month effect Treasuries
End of month effect Treasuries

Number of trades: 255

  • CAGR 4.7%, buy and hold CAGR 3.8% (dividends reinvested)
  • The average gain per trade is 0.4%
  • Exposure (time in the market) is 23%
  • The win ratio is 61%
  • The average winner is 1.4%, the average loser is 1.15%
  • The profit factor is 1.8

These are pretty solid numbers considering the low exposure to the market, not to mention it has beaten buy and hold.

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 and trading rules:

  • We invest at the close of the month’s last trading day, and
  • We sell at the close of the seventh trading day of the new month.

The trading rules are pretty simple, and we can see the performance leads to a big loss since TLT’s inception:

Calendar effect long term Treasuries
Calendar effect long term Treasuries

Let’s look at the performance metrics:

  • Number of trades: 256
  • CAGR -4.5%, buy and hold CAGR 3.8%
  • The average gain per trade is -0.36%
  • Exposure (time in the market) is 28%
  • The win ratio is 39%
  • The average winner is 1.6%, the average loser is 1.6%
  • The profit factor is 1

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?

Let’s make a strategy where we are long based on the end of the month effect in bonds, and we are short the first few days of the month (we use the trading rules mentioned above). We get the following equity curve:

Seasonal trading strategy treasuries and bonds
Seasonal trading strategy treasuries and bonds

When we combine the two strategies we get an annual return of 10.2% – compared to buy and hold of 3.8%. Max drawdown is 24% compared to buy and hold’s 48%.

Can the potential short strategy be improved?

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 (see strategy #17):

TLT seasonality
TLT seasonality

Remember, this is a short strategy. The average gain per trade is 0.6% and CAGR is 5.5% (unleveraged) and the profit factor is 2.

We assume that the strategy works well for diversification purposes in a portfolio of many strategies.

Bond seasonal trading strategy
Bond seasonal trading strategy

“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:

The bear market of 2021-23 has impacted, but we suspect it might be temprary.

  • Number of trades: 256
  • CAGR 8.6%, buy and hold CAGR 3.8%
  • The average gain per trade is 0.73%
  • Exposure (time in the market) is 61%
  • The win ratio is 62%
  • Max drawdown is 29%

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.

Calendar effects in long-term Treasuries – complete Python code

@DrDanobi (Twitter) used our article to show how it can be programmed in Python. This is the code:

Python code for calendar effects in long term Treasuries
Python code for calendar effects in long term Treasuries

FAQ:

– What are calendar effects in the stock market, and how do they apply to long-term Treasuries like TLT?DrDanobi was so

Calendar effects refer to recurring patterns in asset performance over specific time periods. In this article, we explore calendar effects in long-term Treasuries, particularly focusing on the TLT ETF, which tracks 20-year Treasury bonds.

– What is a calendar effect, and how does it apply to long-term Treasury bonds like TLT?

A calendar effect is a persistent pattern observed in the market. In this context, we analyze the calendar effects in long-term Treasury bonds, specifically using the TLT ETF, with a focus on the first seven trading days and the rest of the month.

– What is the relationship between interest rates and the price of bonds, particularly TLT?

Understanding the relationship between interest rates and TLT price is crucial. The article provides a concise primer, explaining that when TLT price increases, interest rates go down, and vice versa, due to the inverse relationship.

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