Bonds: Seasonal Trader

Trade when you spot a pattern with high odds, stay clear when the odds are low

This tool is designed to exploit short-term trading patterns, and intended for traders, arbitrage plays over time and to assist long-term investors in fine-tuning entry and exit points. It uses end-month data to illustrate seasonal trading patterns.

A rise represents an increase in value. For bonds this means total return on benchmark ten-year government bonds (i.e. capital appreciation plus income earned). Volatility will be proportionately less for bonds of shorter maturity and may be higher for those of lower quality.

Each series shows the cumulative gain or loss as the year progresses. Thus, starting from zero at the beginning of the year, a 1% gain in January followed by a 2% gain in February show up as +3% for February. A fall of 1% during the next month would show up as +2% for March.

In order to identify possible changes in behaviour patterns over time, separate series are shown for short, medium and long-term averages. The time-frames selected are 4, 12 and 24 years to reflect respectively one, three and six electoral cycles, as discussed in the GuideBook. The shorter the time-scale, the stronger the line, in recognition that more recent experience has greater significance. Thus the white line is the short-term series, the light grey line is the medium-term series and the dark grey line is the long-term series.

To indicate of the odds of making profits or losses in any month of the year, white percentage figures are attached to the longest time-scale. These odds are calculated using up to 24 years of data, where available. Thus, for example, 67% against a rising month shows that the changes of a profit in that month are 2 in 3. Equally 67% against a fall shows that the chances of a loss in that month are 2 in 3. Conversely 33% indicates that there is only 1 in 3 chance of making profits in that month.

To achieve the most reliable results take action where all series demonstrate a similar seasonal pattern - especially where confirmed by the odds shown. Please note that bond charts show an upward bias throughout the year. This is due to the accumulation of interest in total returns.To adjust for this, look for changes relative to trend. In addition it may be helpful to study the charts comparing seasonal performance to a world averages, using the global perspectives.

While the database is as comprehensive as possible, it does not cover all situations. In some cases the longer-term series in individual countries may be missing. Euro conversion renders analysis of bonds denominated in legacy currencies irrelevant.

Back-tested past performance of this strategy shows that this simple and predicatble technique can be remarkably effective.

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