A Seasonal Trade with Bonds

Focus: DIVIDEND

Jeffrey Hirsch Image Jeffrey Hirsch Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

The long bond tends to bottom sometime during Q2, typically around the time the stock market reaches its highs, and then enjoys a solid run of strength into Q3 and beyond in some years, explains seasonal trading expert Jeffrey Hirsch, editor of the Stock Trader's Almanac.

Bonds are also a relatively safe place to park capital during the “Worst Six Months” of the year for stocks, May through October.

When investors feel threatened with a potential decline in the stock market, they often allocate more money into bonds. This is often referred to as the “flight to safety” trade.

Investors and traders will also allocate more money to bonds when they believe the yield is more attractive than other shorter-term investment options. 

By going long, the September 30-year Treasury bond on or about April 27, and exiting the position on or about August 21, we discovered in the last 39 years a respectable 69.2% success rate.

This trade has a history of 27 wins with 12 losses. The trade’s track record over the last 28 years is even better with 21 gains and a success rate of 75.0%.

Although the specter of additional Fed interest rate hikes loom large, this trade will likely still perform this year as our bond yields remain attractive to foreign buyers.

Our 30-year Treasury bond yielding around 3.0% does compare quite favorable to Germany’s 1.03% or Japan’s 0.83%.

Growth and inflation expectations also remain on the tepid side so even if short-term rates increase due to Fed action, long-term rates may not necessarily rise.