Seasonal Trends May Favor Bonds Over Stocks for the Rest of September

  • Yields have dropped 18 basis points on average since 2009
  • Fed’s balance sheet rolloff seen testing historical pattern

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History fans take note. Seasonal trends for the second half of September have been decidedly negative for the S&P 500 Index and positive for Treasury bonds.

Yields on benchmark 10-year notes have declined about 18 basis points in the last two weeks of the month on average since 2009, according to Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings. The pattern could even continue as the Federal Reserve begins to unwind its massive bond holdings, he said.

“You’ve had a somewhat consistent move in the stock market, with it tending to sell off in this part of the year, which put bond yields in a positive formation,” said di Galoma. “Treasuries could rally pretty substantially after the Fed.”

The S&P declined in the second half of September in five of the past eight years. Bloomberg’s seasons charting tool (SEAG), shows the S&P’s patterns over five years:

After months of telegraphing its plan to markets, the policy-making FOMC is expected to announce the start of a balance sheet draw-down Wednesday, beginning with reductions of $10 billion a month.

Could the next two weeks play out with the 10-year Treasury matching the seasonal tea leaves, with its yield ending the month at about 2.06 percent, down from 2.23 percent now?

“Anything is possible,” said di Galoma.

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