A seasonal window is opening between now and August that looks favorable for lower rates, particularly at the long end of the curve. Bond traders have seen this pattern enough times to pay attention:
Key reasons for declining summer yields:
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“Summer slowdown” and lower liquidity: Trading volumes typically decline when institutional investors go on vacation, which can reduce liquidity and, paradoxically, lead to more aggressive “yield-seeking” behavior among remaining managers.
Reinvestment flows: Large coupon payments on investment-grade bonds often come due or are paid in June and July, leading portfolio managers to reinvest this cash in new long-term bonds.
“Sell in May” effect: As some investors shift out of stocks and into lower-risk assets such as long-duration Treasuries, demand increases, driving up bond prices and lowering yields.
Weakening economic data: Markets often experience a lull in data releases, and summer jobs reports often indicate weakening, fueling market expectations of a more dovish Federal Reserve.
Seasonal Positives by Duration: Historically, April through August is the strongest period for bonds (a “bullish” pattern), compared to the bearish period of high-yield issuance in early fall.
It’s not a guaranteed move, but the setup is there again this year and the positioning has started to reflect it.
Two things are helping the case right now. First, we are approaching the close of the US government’s fiscal year in September, and history shows that rates often decline before that period, as Treasury issuance patterns and budget flows create some natural demand for longer securities. Second, tensions between the United States and Iran appear to be easing, which should ease pressure on oil prices in the coming months. Lower energy costs would ease concerns about inflation and give the long term more room to recover as market prices experience less persistent price pressure.
Technical image
Source: Bar chart
Technically, the nearby weekly chart of 30-year bond futures looks lethargic. The 50-week simple moving average is moving sideways. While the Federal Reserve might be waiting for inflation to return to its 2% target, the long end of the yield curve appears to be finding its happy spot. We will discuss the next seasonal pattern soon, but for reference, I have highlighted (in green boxes) the seasonal patterns of higher prices and lower yields from the last two years. The last green box is the big question: will we see the traditional rally in the price of 30-year bonds this year?
seasonal pattern
Source: Moore Research Center, Inc. (MRCI)
MRCI research conducted over the past 15 years on the September 30-year bond futures contract (blue line) reveals that its seasonal low typically occurs in late February. This year, the low occurred a month later, at the end of March. The bond market then briefly rallied before retesting the seasonal low in May. The break occurred in early May and as long as the February low holds, we have a good chance of the seasonal low holding. The yellow box represents MRCI’s optimal buying window. The duration is 87 calendar days, allowing short-term traders to trade in and out of the market with a bullish bias, or long-term traders to build and manage a core bullish position.
Results from MRCI’s extensive research have revealed that September bond futures closed higher on approximately August 4 than on May 10 in 13 of the last 15 years, an 87% occurrence. During the hypothetical testing period, 4 of the years did not have a daily closing reduction. The average net profit per contract was $4,343.75.
As a crucial reminderWhile seasonal patterns can provide valuable information, they should not be the basis for trading decisions. Traders should consider technical and fundamental indicators, risk management strategies and market conditions to make informed and balanced business decisions.
Assets to participate in the rising interest rate market
Treasury Bond Futures (bond prices expected to rise/yields to fall):
30-year US Treasury bond (ZB) futures: the direct instrument. Traded on CME, highly liquid, with each point valued at $1,000. This is the primary contract for playing long end.
10-year Treasury (ZN) futures: Highly correlated with 30-year bonds, although with a shorter duration. Many traders use it as a liquid substitute or combine it with the 30-year bond for curve trading.
iShares 20+ Year Treasury Bond ETF (TLT): The most popular ETF for long duration Treasury bonds. It moves closely with 30-year futures, but trades like a stock with easier access for smaller accounts.
Vanguard Long-Term Treasury ETF (VGLT): Tracks longer-term Treasury bonds (average maturity in the 10-25 year range) with low costs and strong liquidity.
Other long-term government bond ETFs include SPDR Portfolio Long Term Treasury ETF (SPTL), Schwab Long-Term US Treasury ETF (SCHQ), or iShares 25+ Year Treasury STRIPS ETF (GOVZ) for more targeted exposure.
Options on 30 or 10 year futures: Calls or call spreads for leveraged directional bets with defined risk.
To close…
In the end, this seasonal window from now through early August offers one of the most consistent setups in the Treasury market, showing in 13 of the last 15 years where September 30-year bond futures closed higher around August 4 than on May 10 – an 87% hit rate according to MRCI data. That’s not random; aligns closely with the U.S. government’s fiscal year, which ends in September, when issuance patterns, budget flows and reinvestment activity tend to create natural support for longer-dated securities. Whether you trade ZB futures directly, use the highly correlated 10-year ZN contract, or prefer TLT and other ETFs, the setup is worth watching. Just remember that seasonal factors are a bias, not a crystal ball; Combine these with strong risk management and remain flexible if fundamentals change.
As of the date of publication, Don Dawson had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
