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How Sunshine Affects the Bond Market

Jun 19, 2015

Ah, springtime. It's the time of year when the trees and the flowers start to blossom, the birds start singing, the weather warms up, the grass turns green, and…Treasury bond returns start to rise?

Seasonal clichés are not unusual in the market, "sell in May and go away" is a classic that seems to hold in the equity market. Since 1950, according to the Stock Trader's Almanac, the Dow averages a 7.5% gain in the November through April periods and only a 0.3% gain from May through October.

Given that relationship, it stands to reason that in aggregate bonds, there would be a relatively better investment in May through October. If you do pull some of your money out of stocks, you are not just going to hide it under the mattress.

Why these relationships hold is another matter. Lower trading volumes in the summer, vacation effects, and other theories have been posted over the years.

Lisa Kramer, a researcher at the University of Toronto, has a different theory. Her team finds that Seasonal Affective Disorder (SAD) can be extended beyond the effect on individual investors to produce a tangible effect on the overall market. The shorter, gloomier days of winter appear to be having a measurable effect on the bond market.

Kramer's group found that monthly returns on Treasuries change by 80 basis points on average from October to April. Bond returns hit their peaks in the fall and troughs in the spring. After studying multiple potential factors, including the auction cycles for bonds and fluctuations in supply, Kramer's group concluded that the appearance of the sun, if you will, reduces the overall effect of SAD and "brightens up" the bond market.

The full paper is scheduled to appear in an upcoming issue of Critical Finance Review.

What is the connection between SAD and bonds? Kramer suggests that it is risk aversion brought on by SAD. Her previous work on stocks suggested that seasonal cycles also affect stock markets through SAD-based risk aversion. Finding the opposite effects between the Northern and Southern hemispheres bolsters her argument, as one would expect given the opposite cycles of summer and winter. The full paper is not yet available for review, but the current summaries suggest a complementary pattern that explains bond returns using seasonal factors.

Should anything be done about this? Should all winter financial efforts in the U.S. take place in Phoenix or Miami from now on? That may spark some spirited discussions and pleading with financial executives, but we suggest that the solutions are simpler.

Traders are not always known for their life balance. Those who suffer from SAD should be encouraged to get out more often and take vacations in sunny locales to balance out their lives. That certainly seems like reasonable advice even without any stock market indicators. Meanwhile, traders suffering with more severe cases of SAD might benefit from various therapies. If you are in this position, there is more suffering going on than just with your market performance. Get the help you need.

Should you switch your ratios of investments to match the hemispheres? Probably not. Just like "sell in May and go away," this finding is a generality. Monitor your investments with the usual broad view in mind.

We are looking forward to the next movie remake of Little Orphan Annie in which she visits Wall Street and sings, "Bond returns will go up tomorrow...you've got to buy bonds tomorrow, come what may!"

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