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A Seasonal Trade with Bonds

04/12/2017 2:50 am EST


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. Brexit concerns and a pending showdown over the debt ceiling could also trigger a flight to safety.

Stock traders may consider the exchange-traded fund, iShares 20+ Year Bond (TLT), as a replacement for the futures contract.

TLT has a little more than $6 billion in assets, typically trades more than 3 million shares per day and has a reasonably deep and liquid options chain available. TLT’s expense ratio of just 0.15% is very reasonable and its current yield just under 3% is also an attractive. 

Stochastic, MACD and relative strength indicators applied to TLT had improved substantially since mid-March, but have begun to turn less positive. Should equity markets strengthen as they usually do in April, TLT would be attractive on dips below $117.65.

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