Seasonal decline? Global long-term bonds face a "black September"

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Global long-term government bonds are experiencing one of the worst-performing months in history, as seasonal selling pressure resonates with multiple structural factors, driving long-term bond yields to continue rising.

According to media statistics, over the past decade, global government bonds with maturities over 10 years have had a median loss of 2% in September, making it the worst-performing month of the year. So far this year, ultra-long-term bonds have recorded a 2.6% decline, narrowing their year-to-date gain to 3.5%, while short-term bonds have risen 7.9% in the same period.

Behind this trend is the cumulative effect of multiple factors. In Europe, the nearly 2 trillion euro Dutch pension reform is restructuring the market landscape, with German and French 30-year government bond yields rising for four consecutive months to multi-year highs. In the United States, investors are preparing for Friday’s employment data release, which will influence market expectations for a Fed rate cut this month.

Market participants generally maintain a cautious attitude in September as the seasonal increase in bond issuance intermingles with political uncertainty, putting additional pressure on long-duration bonds.

September Effect: Seasonality Revealed by Historical Data

September has always been a “cursed month” for long-term bonds. Statistics show that in the past decade, government bonds with maturities over 10 years had a median loss of 2% in September.

Mohit Kumar, Chief European Strategist at Jefferies International, mainly attributes this seasonal phenomenon to issuance patterns:

The typical increase in long bond issuance in September is the main reason for the seasonal decline.

There is little long bond issuance in July and August, and also not much after mid-November.

This supply pressure is particularly evident during the relatively low liquidity period of late summer.

Shimomura, senior portfolio manager at Tokyo Fivestar Asset Management, attributes the volatility to changes in policy expectations:

September is often the time when monetary policy takes a sharp turn and is also the month for repositioning in anticipation of policy change.

Dutch Pension Reform Impacts European Bond Market

In the European market, the structural reform of the Dutch pension system is having a profound impact on Europe’s long-duration bond market.

According to ING Group strategists, partly due to this reform, the indicator measuring 30-year euro swap volatility has risen recently. Yields on German and French 30-year government bonds continue to climb and are now trading near multi-year highs.

The core of the reform is a shift in investment approach. The new system requires younger members’ funds to invest more in equities and other risk assets, reducing demand for long-duration hedging tools; older members' savings tend to be allocated to bonds and other safe assets, but the hedging duration will also shorten.

According to ECB data, Dutch pension savings account for more than half of the EU total, holding nearly 300 billion euros in European bonds.

About 36 Dutch pension funds are scheduled to switch to the new system on January 1 next year, a time when market liquidity is usually quite thin. If many funds simultaneously seek to close long-duration hedging positions, it could cause blockages in trading systems.

Pierre Hauviller at Deutsche Bank points out that the transition may be "front-loaded" and the market is pricing this in, "volatility trades for early January are already very crowded."

Global Markets Face Multiple Challenges

Aside from European factors, the global long bond market faces other challenges.

In Japan, Tuesday’s 10-year government bond auction and the upcoming 30-year bond issuance later this week are attracting close attention, as investors try to gauge demand for Japanese debt amid doubts about Prime Minister Shigeru Ishiba's leadership and expectations of a central bank rate hike.

Strategist Mark Cranfield analyzes that JGB traders will focus on the bid-to-cover ratio in the 10-year bond auction, with any number below 3.0 seen as weak. The last time similarly disappointing data appeared was in May, coinciding with the beginning of the Japanese yield curve sell-off.

In the U.S., Friday’s employment data will be a recent market risk point, with traders waiting to confirm bets on a Fed rate cut this month. At the same time, eurozone inflation data is also under traders’ scrutiny.

Evelyne Gomez-Liechti, multi-asset strategist at Mizuho International London, said that stronger-than-expected U.S. data and a possible hawkish shift by the Bank of Japan are catalysts that could worsen this month’s bond performance. She stated: “There are a lot of risks to contend with.”

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