Bond Market Perspectives | Week of March 10, 2014
- The month of March has historically been difficult for bond investors.
- Given the good start to the bond market so far in 2014, bond investors should be aware of seasonal factors that may negatively impact bond performance.
Beware the Ides of March
The ancient Romans marked their calendars by three periods based upon the changing phases of the moon. The "Kalends" represented the first of each month, the "Nones" fell between the fifth and seventh days, and the "Ides" fell around mid-month between the 13th and 15th. This week brings the Ides of March, which holds a negative connotation, as it corresponds to the date of the assassination of Julius Caesar in 44 B.C.
For bond investors, the entire month of March has a negative connotation, as it historically
represents the most difficult month of performance of the year. Last week, March 3-7, 2014, marked the worst weekly performance for high-quality bonds since September 2013 (as measured by the Barclays Aggregate Bond Index), rekindling fears that the negative seasonal bias of March may be upon the market. The negative seasonal tendency in March is clearly visible when viewing average monthly performance of high-quality bonds [Figure 1].
An historical average of the 10-year Treasury yield shows the seasonal bias in bond yields throughout the year [Figure 2]. The bond market has exhibited a bearish bias during the first few months of the year, but this becomes more prevalent from February through April before a bullish seasonal influence begins in June that lasts through early fall. Note that Figure 2 shows the yield variation is small on average, as the vertical axis reflects a yield range of only 0.6% throughout the year. Seasonal tendencies, therefore, are not a dominant driver of bond market performance but illustrate headwinds and tailwinds that may affect the bond market throughout the calendar year.
A seasonal performance trend is prevalent in the municipal market as well. Like the taxable market, the performance disparity is notable [Figure 3]. The annual deadline to file tax returns, April 15, is a primary reason why the municipal market has suffered in March. Since municipal bonds are typically owned by higher net worth, higher tax bracket investors, municipal bonds are often subject to heavier selling in March as investors raise cash to pay taxes on capital gains from other investments. Additionally, March has typically been a very light month for maturing bonds, leaving investors fewer proceeds to reinvest into the municipal bond market. In sum, the tax season creates its own supply-demand challenges for the municipal market and, given last year's strong equity market gains, tax-related sales should not surprise investors in 2014.
There are no clear-cut reasons for seasonal performance patterns in the taxable market. March is
typically a period of heavy T-bill issuance as the government prepares for tax refund season. While the extra issuance can exert upward pressure on short-term yields, which can also pressure
longer-term yields higher, supply alone is not as dominant a factor as it is in the municipal market.
The taxable market is subject to steadier demand from both individual and institutional investors,
and maturities are more evenly distributed throughout the calendar year.
On three separate occasions the Federal Reserve (Fed) influenced March performance. In both 1999 and 2004, the Fed began increasing interest rates in June. Bond prices declined and yields rose in advance of the first rate increase as forward-looking markets priced in potential changes. March performance was poor in both of those years. In 1994, the Fed began hiking rates in late January but surprised markets with an inter-meeting rate increase in April 1994, causing a sharp sell-off in the bond market. However, Fed actions alone cannot explain away more than two decades' worth of return history. The reasons for seasonal bond market weakness in March and April may not be fully explained, and are perhaps coincidental, but are certainly respected among bond market participants.
The March seasonal performance pattern has been mostly a high-quality bond phenomenon, as the
high-yield bond market has not exhibited the same pattern [Figure 4]. Since high-yield bonds have
some sensitivity to stock prices, it is perhaps no surprise that historical monthly performance
patterns bear a resemblance to that of the stock market, with performance being worse in Septemberand October.
In 2014, diminishing bond supply may counter the impact of negative seasonal factors. Rising T-bill
supply has been one reason for the negative March seasonal performance, but that is unlikely to occur in 2014. In general, the Treasury is still issuing more bonds than needed due to a rapidly shrinking budget deficit, and a reduction in Treasury issuance may be announced in May. A similar
phenomenon is occurring in the municipal bond market where new issuance is running
approximately 35% below the already low pace of 2013 through the first two months of 2014. Limited municipal supply may help offset tax-related selling.
Last week's bond setback is a sign that the March bearish seasonal tendency may be influencing the
bond market once again and puts the bond market on a poor footing as the Treasury gets ready to sell longer-term 10- and 30-year bonds -- a focal point for the bond market this week. Although seasonal factors do not always come to fruition, it is important to be aware of their potential influence. A negative seasonal tendency may be one more reason to take recent gains from high-quality bonds off the table, given the good start to the year for bonds.
The opinions voiced in this material are for general information only and are not intended to
provide specific advice or recommendations for any individual. To determine which investment(s)
may be appropriate for you, consult your financial advisor prior to investing. All performance
reference is historical and is no guarantee of future results. All indices are unmanaged and cannot
be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges.
Index performance is not indicative of the performance of any investment. Past performance is no
guarantee of future results.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields
will decline as interest rates rise, and bonds are subject to availability and change in price.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely
payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed
principal value. However, the value of fund shares is not guaranteed and will fluctuate.
Municipal bonds are subject to availability, price, and to market and interest rate risk if sold priorto maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
Stock and mutual fund investing involves risk including loss of principal.
The Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment grade,
fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes Emerging Markets debt.
The index was created in 1986, with index history backfilled to January 1, 1983. The U.S. Corporate High Yield Index is part of the U.S. Universal and Global High Yield Indices.
The Barclays Municipal Bond Index is a market capitalization-weighted index of investment-grade
municipal bonds with maturities of at least one year. All indices are unmanaged and include
reinvested dividends. One cannot invest directly in an index. Past performance is no guarantee of
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
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