- 1998: Volume 7, No. 1 Seasonal Patterns In The T-bond Market

A market's seasonal pattern refers to its tendency to trend in a given direction at different times of the year. The most obvious seasonal patterns occur in agricultural markets. High prices are reached during the planting or growing seasons of the year when stocks are fixed and being consumed. Price lows occur at harvest time when supplies are large and being replenished. Not many would think the financial markets are seasonal, however, there is reason to believe seasonal patterns do exist.

We all know a market's fundamentals guide its price up, sideways and down over the long-term. For example, bond prices are strongly tied to the economy; the rope being the demand for credit. When consumers increase their spending, demand for credit rises as consumers borrow to finance their purchases and businesses draw on their credit lines in order to increase production. This causes interest rates to rise and a downtrend to unfold in the bond market. There is a tendency for economic activity to ebb and flow during the year therefore there is reason to believe bond prices exhibit a seasonal pattern.

Professors claim every time series (e.g., the price of the T-Bond future over time) has three components: a trend, a seasonal and a noise component. Seasonal studies uncover the price movement associated with different parts or seasons of the calendar year by stripping-away the time series' trend and noise components.

Has the T-Bond future exhibited a seasonal pattern? If so, what are the implications for T-Bond's outlook?

Starting with 20 years (1978 through 1997) of T-Bond futures daily high, low and closing prices, the first step was to eliminate the data's noise component. Intra-day price fluctuations are often caused by random news events or position jostling, so the daily high and low prices were excluded. Then, as a way to eliminate the noise associated with the outer most closing prices, the daily closing prices during each calendar week were averaged. The result was a noiseless T-Bond price series (see Figure 1) composed of one price for each week of the year, for the past 20 years.

Figure 1

Second, the trend component was eliminated. This was accomplished by calculating the 52-week moving average of the noiseless series. (The 52-week moving average represents the trend component of the time series.) Then the average was moved ahead 26 weeks, causing it to bisect the noiseless series (see Figure 2). Next the lead moving average was subtracted from the noiseless series, thereby eliminating the trend component from the series. The remainder was a 20 year, noiseless and trendless series.

Figure 2

Third, working with the noiseless and trendless series, the seasonal component of each week of the calendar year was identified. This was accomplished by averaging each week's 20 values. E.g., the 20 values associated with the first week of the year were averaged. Then the twenty values of the second week were averaged. In the end, each week (1 through 52) had one seasonal value associated with it.

Fourth, the 52 seasonal values were plotted. Finally, the week-to-week pattern was examined. Looking at Figure 3, the T-Bond has two periods of seasonal price weakness (bold bars). The first period begins the third week of February and ends the second week of June (week 7 through 23). The second period begins the fourth week of August and ends the fourth week of October (week 34 through 43). The T-Bond has one period of seasonal strength (slashed bars) that begins the first week of November and it continues through the second week of February (week 44 through week 6 of the next year). The remaining period which covers the third week of June through the third week of August has a mixed seasonal component.

Figure 3

The period of seasonal strength has ended and the initial period of seasonal weakness is beginning. The T-Bond's 52-week moving average is rising, however. In sum, the T-Bond's trend component is positive and the seasonal component is negative. As a result, the contract should trade sideways during the next months or so.

Alex Saitta is a technical analyst for Salomon Smith Barney.