Bonds During the Off Season?

November 7, 2012 • Posted in Bonds, Calendar Effects

As implied in “Mirror Image Seasonality for Stocks and Treasuries?”, have bonds recently been better than stocks during the “Sell-in-May” months of June through October? Are the behaviors of government and corporate bonds over this interval similar? Using dividend-adjusted monthly prices for the PIMCO Long-Term US Government A (PFGAX), PIMCO High Yield A (PHDAX) and for SPDR S&P 500 (SPY) during November 1998 (the earliest available for PFGAX) through October 2012, we find that:

The following chart compares the average return by season (May-October and November-April) for PFGAX, PHDAX and SPY over the available sample period. Calculations start in May 1999 because the early part of the sample is a partial season. Results support the conventional wisdom that stocks are stronger during November-April than May-October. Results also suggest that “safe” Treasury (“junk” corporate) bonds behave oppositely from (similarly to) stocks.

For greater granularity, we look at monthly returns.

The next chart compares the average return by calendar month for PFGAX, PHDAX and SPY over the available sample period. Results indicate that, on average:

Stocks outperform both bond funds in March, April, October and November.
Both bond funds outperform stocks in January, February, May, June, July, August and September.
The “safe” PFGAX outperforms the “junk” PHDAX in February, May, June, July, August, September and November.

In other words, at a monthly level, seasonal patterns fit somewhat but not perfectly.

The correlation between the average monthly SPY return series and the average monthly PFGAX (PHDAX) return series is -0.38 (+0.48), confirming a tendency for “safe” Treasury (“junk” corporate) bonds to behave oppositely from (similarly to) stocks.

For an additional perspective, ignoring trading frictions, a $10,000 initial investment at the end of April 1999 grows to:

$13,403 for buying and holding SPY.
$29,429 for buying and holding PFGAX.
$22,762 for buying and holding PHDAX.
$35,820 for holding PFGAX during May-October and SPY during November-April.

In summary, evidence from simple tests on a very limited sample suggest that “safe” bonds tend to outperform both stocks and “junk” (risky) bonds during the May-October off-season for stocks.

Cautions regarding findings include:

The sample period is very short for calendar analysis. As described in “Stock and Bond Returns Correlation Variability”, the stock-bond correlation is not stable, so results may differ for other periods.
Results for other types of bond funds (in terms of duration and credit rating) may differ. It seems plausible that any seasonal effects would increase with duration.